That’s Credit Suisse’s banks analyst Jonathan Pierce’s take-away from the Barclays conference call, held on Wednesday to discuss the bank’s latest piece of toxic trickery.
Pierce, we should point out, is a true Barc believer – a buyer of the stock, on relative grounds, and an early supporting voice when questions of solvency were raised earlier in the year.
He’s also the top rated banks analyst in Europe. So it’s not a good sign that he opened his latest snap note to clients thus:
The transaction seems a little strange to us.
Pierce is worried that the bank appears to be giving up any potential upside on recovery in the fair value of these structured financial assets, RMBS and other ABS.
He thinks it’s all about paring monoline exposure, but the analyst warns that in any case if a monoline defaults, Barclays will get thumped (emphasis ours):
To the extent we hadn’t factored in any valuation benefit from improving asset values, we are actually more interested in the impact on net interest income of Barclays moving forwards. Management told us that the cashflow on transferred assets was US$1.4bn per annum, but we don’t know how much of that is yield versus repayments of principal. If the US$12bn of assets were to pay down over say 10 years, that would imply practically none of it was yield which can’t be right. We are waiting for an answer on this, but either way we think there is likely to be some net interest income reduction.
That leaves the main question: why Barclays are doing this? We suspect there’s an increasing concern on monolines. Let’s assume there was a monoline default. Before, Barclays would have taken a big fair value hit, particularly as its mark against all monoline exposures was just 28p in the pound at June. Now though, if the cashflows adequately cover the loan interest and principal repayments (which they should) there would be little or no impairment to the loan. Therefore, the transaction is, if you like, a way of swapping the fair value adjustment that would otherwise be taken on a monoline downgrade over a longer period of time through reduced net interest income.
The danger is the market will continue to view the exposures as before, and any monoline downgrade will be taken badly.
Overall, it doesn’t significantly adjust our view of Barclays, and at 1.2 times 2010E TNAV it remains cheap versus the sector, in our view. The danger is the market will continue to view the exposures as before, and any monoline downgrade will be taken badly.
In due course, we would also expect Barclays to look to manage its monoline covered CLO positions. The higher quality of the underlying assets means that a transaction on better terms than this one should be achievable, in our view. Overall though, we view this transaction slightly negatively.
Related links:
Barclays creates $12bn credit vehicle – FT
The smart bit in Barclays’ smart securitisation – FT Alphaville
Toxic assets? Barclays don’t know what you are talking about – FT Alphaville