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UK Chancellor outlines plans to convert Northern Rock's £25bn Bank of England loan into State-guaranteed bonds; Northern Rock shares surge over 36%

UK Chancellor Alistair Darling has outlined plans to convert Northern Rock's £25bn Bank of England loan into bonds before selling them to investors.

The bonds will be State-guaranteed to speed up a private sale of the embattled lender that was rescued from collapse in September 2007.

However, there is no certainty of a private sale and  the bank may be nationalised  for a temporary period.

The UK government will also guarantee savers' deposits. Northern Rock shares jumped 42% after the news, rising by 26.5 pence to 91 pence. At lunch time, the share price was up over 36% on an otherwise bleak day for the markets.

Darling plans to make a statement to the House of Commons at 1530 GMT.

Bidders have until 4 February to come forward with rescue proposals based on the UK Treasury's plans.

The scheme was proposed by bankers Goldman Sachs and was given the approval by Prime Minister Gordon Brown over the weekend.

Northern Rock debt has in effect been converted into government bonds or gilt-edged stock.

That would mean the taxpayer would be exposed to Northern Rock for a much longer period than planned, for five years or longer, analysts claim.

The UK Treasury's plan still needs to be approved by the Financial Service Authority (FSA), and comply with the European Commission's rules on state aid for companies.

Northern Rock's Bank of England loan facility will be extended until 17 March to allow time to explore the proposed financing structure with Northern Rock and interested parties.

Currently, there are three front-runners: Olivant, the consortium led by Virgin, and a standalone plan being developed by the bank's board.

Reports claim that Richard Branson's Virgin Group was preparing to make an improved offer for the beleaguered lender.

According to the Sunday Times, Virgin is preparing to cut its proposed stake in Northern Rock from 54% to 45%. Such a move would allow existing shareholders more room to share in any recovery in the price of Northern Rock stock.

On Saturday, Sir Richard said he had a "winnable package" to ensure the success of his bid for Northern Rock.

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