Barclays Are At It Again

23rd September 09 – Barclays are at it again

My favourite maverick bank, that can only be Barclays (please read my earlier entries in this diary or think back to the TV documentary on the collapse of Lehman Brothers in which the boss of Barclays, Bob Diamond – an American – played quite a starring role) have pulled another flanker.

Britain’s second-largest bank has “sold” £7.5bn of its riskiest assets to a new company called Protium (the most common isotope of hydrogen) Finance. The new company is registered in the Cayman Islands and will be run by two former Barclays investment bankers and 43 colleagues, all of whom have resigned from Barclays Capital on completion of the deal and will charge Barclays $40m annual management fee, including office costs. If this all sounds somewhat surreal, then that is probably because it is.

The detail of how Barclays pulled off this deal are complicated but very interesting and may provide a blueprint for similar transactions in the future and not necessarily linked to Barclays toxic assets. Barclays has provided Protium with a 10-year, $12.6bn loan to buy the assets. The sale allows the bank to “derecognise the assets” by shielding it from any further falls in their “mark-to-market” value. Ian Gordon of Exane BNP Paribas said that the deal will provide “a boost to its capital strength by punting the issue into the long grass.”

The loan from Barclays to Protium is unusual. It will earn interest at 2.75% above the US inter-bank rate. This interest (which could accumulate to $3.9bn over the 10 year life) will be paid after investor returns. These investors, as yet unknown, are injecting $450m to earn 7% a year.

So far as I can see, the transaction will remove volatility from Barclays’ balance sheet, but the bank’s regulatory capital will not be changed until the loan is repaid on a gradual basis.

All seems like a return to the old days. Have the bad assets gone away?