Tuesday, September 22, 2009


Following up the comments by Gillian Tett, Lex offers a slightly less Machiavellian view of the Barclays disposal.

“The transaction is, if you like, a way of swapping the fair value adjustment that would otherwise be taken on a monoline downgrade over a longer period of time through reduced net interest income,” said analysts at Credit Suisse.

But the analysts note the danger is that the market will continue to view the exposures as before and that any monoline downgrade will be taken badly.

Other analysts are concerned that, in return for stability, Barclays is giving too much away to Protium’s backers and managers.

Cayman Islands-based Protium is providing $450m of funding for the assets, mostly from two unnamed substantial US and UK investors.

The investors will be entitled to fixed payments of 7 per cent a year for 10 years on their initial investment. Any excess cash flow after repayment of the loan to Barclays will also be taken by the investors.

C12, a US asset management company that runs Protium and is mostly made up of former Barclays Capital executives, will also see some of the benefits. C12 will receive a $40m annual management fee to administer the assets.

And while Barclays is transferring a chunk of the risk, it is also handing away some of the potential upside to Protium and C12 if the values of these assets recover.

If assets of $12bn went up in value by just 1 per cent, the Protium investors could have made $120m on their original $450m investment – a return of 25 per cent.

Not only that but Barclays could be exposed to any downside if the assets fall in value. Protium has working capital but does not have an equity cushion to burn through before taking losses.

The cash flows come from assets that were once valued at far more than $12bn and so Barclays believes that even if some of the assets fell in value it would not disrupt the cash flows to the extent that its loan is impaired.

The structure of the deal also means that Protium and C12 receive payments from the cash flow ahead of any interest payments made on the Barclays loan.

“This structure is unusual as it implies Barclays’ loan is subordinate to the management fees,” said one analyst.

Another oddity is the fact that Barclays has derecognised the assets on its balance sheet for accounting purposes but has kept them on its balance sheet for regulatory reasons.

Nevertheless, Barclays’ move could be the first in a series of these types of deals as investors seek to make a return on these toxic assets – particularly if the banks involved are prepared to offer juicy returns.

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