Barclays took a beating on Friday, triggered by a string of rumours across the sector. The bank’s share price tumbled - trading more than 7 per cent lower for much of the session.
While some followers, such as John-Paul Crutchley at Merrill Lynch, were dismissing this as a “Friday bear raid in a skittish market,” others continued to point towards the MBS and CDO markets, where the latest slew of downgrades by the rating agencies has inflicted particular pain over the past few days.
Some of that pain seems to have translated into fears about three conduits Barclays runs: Sheffield Receivables Corporation, Stratford Receivables Corporation and Surrey Funding Corporation.
In the last reports available from the rating agencies, all three conduits boast high ratings and intricate credit protection arrangements. But two of the three have significant exposure to the mortgage market - through MBS.
Here’s a breakdown of the three:
Sheffield Receivables
Asset commitments at $30.6bn, $21bn on CP outstanding, as of July 31.
Among other things, Sheffield takes short term “warehoused” assets - mortgage securities which are being stored for later use in structured products. Says Moody’s:
Twelve short-term mortgage warehousing facilities totalling $6 billion in commitments were added between December 2006 and July 2007. All new additions have similar structure and provide financing for the mortgages prior to term securitization. The transactions have durations from 90 to 180 days. All of the mortgages entering the facility are current, and deal-specific enhancement is 10%. Due to the short term nature of these transactions and the lack of new originations in the mortgage area, only about $1.35 billion of these transactions backed by Alt-A collateral was outstanding as of September 2007. Currently, no subprime mortgage collateral is being financed.
Meanwhile, the latest report OCT from Standard & Poor’s indicates that Sheffield has 21 per cent of its assets invested in mortgage securities - the single biggest asset class in which it invests. The conduit has halved its exposure to MBS in the past two months. In July it was 44 per cent invested in mortgage backed paper.
And what is the extent of Barclays exposure? Moody’s says:
Sheffield’s required amount of program-level credit enhancement is the greater of 10% of all purchase commitments (excluding highly rated assets and guaranteed assets) or $325 million. 100% of the Sheffield Receivables Corporation required amount of program-level credit enhancement is provided by Barclays in the form of a letter of credit.
The minimum amount of the letter of credit is $325 million. The amount of the letter of credit cannot be reduced (except for the payment of losses on the portfolio) upon the occurrence of a program wind down event. The freezing of the amount of the letter of credit upon a program wind down is designed to provide additional protection to ABCP investors for losses incurred at the end of the wind down period.
The program letter of credit may be used to repay maturing ABCP as well as to absorb losses on the underlying assets and to repay any amounts avoided as preferential transfers.
Stratford Receivables
BarCap has already gone a long way towards winding Stratford down. It currently has only $1.4bn assets under management, down from a pre-crunch size of around $12.6bn.
All of Stratford’s assets are now in credit card securities. But it once contained $4bn in “warehoused” mortgage securities, according to Moody’s. Here’s what it looked like in July:
Surrey Funding
Surrey funding was until recently the smallest of all three BarCap conduits, but perhaps also the most worrisome since it contains by far and away the largest slice of MBS as a proportion of its portfolio. And while it now has only 3 per cent exposure to CDOs (and those are pre 2002 vintages), it does still contain 4 per cent subprime backed-mortgage securities.
Liquidity support for Surrey’s ABCP will be provided through a liquidity agreement with Prime-1-rated Barclays Bank. Initially Barclays will provide 100% of the liquidity. Liquidity will provide a source for the payment of ABCP in the event that new ABCP cannot be issued.
Perhaps most significantly for Surrey Funding, however, in the light of Moody’s mass downgrades of RMBS this week, are the asset concentration limits it has to bear:
Friends of Barclays told FT Alphaville that the conduits were conservatively managed. Surrey funding, for example, as yet contains only triple A rated assets. Indeed, it doesn’t look like any of Barclay’s conduits have had too much trouble rolling their CP - unlike most SIVs.
But in the current market, where the raters are slashing some AAA securities by 14 notches in one swoop, anything with mortgage security exposure is likely to have people spooked.
