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
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.