So, Barclays much heralded “smart securitisation” has arrived, and the blogosphere is raging with conspiracy.
Agreed, there are many aspects of this deal that will go down like a lead balloon, at least in public relations terms.
Many are likely to wince at terms like “toxic assets”, “Cayman Islands”, “senior former BarCap employees” and, ahem, even the word “Barclays”. Even worse is the choice of “protium”, which in its own faux-sleek emptiness recalls the securitisation vehicles that roiled the banking system in the first place.
But Barclays latest caper might just prove to be pretty smart.
Simply put, this is Barclays way of placing an extra $450m between it and the $12.3bn of waste sitting on its balance sheet.
Investors in Protium are buying exposure to a high risk bundle of structured financial assets that could have a massive upside, but will take the first loss if things get worse.
Barclays, meanwhile, gets USD Libor plus 2.75 per cent on the $12.6bn loan it makes to Protium (which they estimate will net the bank $3.9bn over the period – or a 31 per cent return over 10 years ).
Note that Barclays have said they will seek a credit rating on the loan. There is a view that the rating will most likely be higher than the aggregate rating of the toxic assets, if only because there is now a fresh “equity slice” to take an initial hit. Barclays, of course, will be in a position not dissimilar to that of a senior unsecured bondholder.
In the future there is the chance that Barclays could sell off the loan, cleansing itself of all involvement. For now, though, while the bank retains significant credit risk, a portion of risk has certainly been transferred elsewhere – to investors in Protium, whoever they may be.
We assume they are consenting adults.
Related links:
Toxic assets? Barclays don’t know what your talking about – FT Alphaville
Is it a SIV, is it a fund, or is it just accounting arbitrage at Barclays? – FT Alphaville