Barclays' asset restructuring shows promise

A transaction with Protium Finance looks like a good move for shareholders, but will not remove all high-risk assets from Barclays' books

Erin Davis | 22-09-09 | E-mail Article

Last Wednesday, Barclays announced plans to restructure its exposure to $12.3 billion (GBP 7.4 billion) of troubled assets, including $4.1 billion of U.S. subprime and Alt-A mortgage debt, along with $2.0 billion of residential mortgage-backed securities and $2.5 billion of commercial real estate mortgage-backed securities insured by monoline insurance companies whose solvency is in question. The assets will be sold to a newly created fund, Protium Finance, which will be funded by $450 million of equity and a $12.6 billion loan from Barclays. The assets will be sold for their current value on Barclays' balance sheets

Barclays said the transaction is intended to stabilise its returns from these assets--the bank will receive regular interest payments on the loan but any excess income from the assets will accrue to Protium, not to Barclays. Overall, we think the move is a good one for shareholders, as it reduces uncertainty and provides evidence that Barclays' asset valuations are realistic. It largely eliminates exposure to monoline-backed residential and commercial real estate mortgage-backed securities and reduces exposure to subprime and Alt-A securities by more than 60%. By no means, however, does the transaction remove all of the high-risk assets from Barclays' book. Barclays will retain $14.5 billion of exposure to commercial real estate and $11.4 billion of exposure to leveraged finance. Moreover, because Barclays is providing the loan, it will remain exposed to losses if the assets drop by more than $450 million in value.

Erin Davis is a senior equity analyst with Morningstar.com.

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