Barclays Plc, the UK’s second-largest lender, agreed to sell $12.3 billion of debt to a fund run by two former executives as it seeks to reduce losses linked to credit-market volatility.
Barclays will sell the assets, including bonds backed by US subprime mortgages, to Protium Finance LP, set up by Stephen King, former head of the bank’s principal mortgage trading group, and Michael Keeley, who was a member of Barclays Capital’s management committee, the London-based bank said in a statement today. Protium will fund the purchase with a $12.6 billion loan from Barclays and $450 million from investors.
Barclays said it won’t record a gain or loss from the sale, and the assets will remain on its balance sheet for regulatory purposes. By moving the loans to the fund, Barclays will insulate its earnings from changes in the fair value of the assets that caused 1.2 billion pounds of pretax losses last year. It will only take a writedown on the loan if cashflow from the assets is impaired, the bank said.
Protium is a way for Barclays to “wriggle free from its toxic assets,” said Simon Maughan, an analyst at MF Global Securities in London, who has a “buy” rating on the lender. “They are still on the hook from a regulatory perspective and if the assets explode, they won’t pay the loan back.”
Protium’s partners will get any excess cash in the fund after repaying the 10-year loan from Barclays, the bank said. Management fees and distributions to partners of about $40 million a year will be paid before interest and principal payments on the Barclays loan, Finance Director Chris Lucas told journalists on a conference call today.
Barclays may receive $3.9 billion of interest over the life of the loan, Lucas said. The cashflow from the assets is equal to $100 million to $120 million a month, he said.
“They’re giving up a potential recovery for more predictable cashflow,” said Simon Adamson, an analyst at CreditSights in London.
“If things go wrong, any impairment charge on the loan would probably be smaller, or less volatile, than a fair value write-down on the assets.”
About 45 former employees of Barclays Capital, the securities unit of Barclays, are joining Protium, which will also seek to manage assets from third parties, Lucas said. Keeley and King, who previously worked in structured finance at Credit Suisse First Boston, went directly from Barclays Protium, the bank said.
The assets being transferred to Protium include $8.2 billion of investments linked to bond insurers and $2.3 billion of mortgage- and asset-backed debt, Barclays said.
“This transaction is part of an ongoing process to manage and reduce our credit market exposures and is a further step in managing that risk,” Lucas said.
Barclays rose 3 per cent to 380 pence today in London trading, valuing the bank at 41.9 billion pounds. It is the best-performing UK bank stock this year.
Unlike UK-based Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, Barclays avoided taking a government bailout during the credit crisis. The bank has bolstered capital by seeking cash from Middle Eastern investors and selling its Barclays Global Investors unit for $13.5 billion to US money manager BlackRock Inc.
