Barclays Shuffle Balance Sheet Risk And Pleases Shareholders

Barclays’ (BCS) lawyers and investment bankers have been working overtime recently checking and double checking the rule book in an effort to restructure potentially toxic balance sheet assets.

That hard work paid off this week with the announcement that the bank had successfully turned $12.3bn of its higher risk credit instruments into a loan. The investment banking team who managed the assets previously have resigned from their Barclays’ posts and have formed a Cayman Islands company, Protium. Barclays has loaned Protium, $12.6bn, over 10 years to buy the assets. The loan is priced at US LIBOR plus 2.75%. Protium has also received a further $450m capital investment from hedge funds.

The bank now has a relatively tidy and predictable income stream from the loan rather than a yield from the basket of risky assets the underlying valuation of which is uncertain and potentially volatile.

The assets; $8.2bn of structured credit assets insured by monolines, asset backed securities of $2.3bn and residential mortgage assets of $1.8bn will remain on Barclays’ balance sheet for regulatory purposes and will not therefore reduce the regulatory capital required but the transaction should reduce earnings volatility.

Assisting the bank in the incestuous, though perfectly legitimate, transaction is Barclays Capital who acted as advisor on the deal.

BARC shares rallied on the news as investors agreed with Barclays’ management who predicted the transaction would help the bank achieve “more stable risk adjusted returns for shareholders”.

Before the announcement the shares had already rallied from less than 50p to more than 350p during 2009 on the back of improving market-wide risk appetite. Investors have also bought Barclays stock in preference to Lloyds Group (LYG) and Royal Bank of Scotland (RBS) in appreciation of its continued independence. Barclays survived the recession without the need for a government bail-out, unlike LYG and RBS.

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