Barclays dismisses fears over debt problems

Aug 29 2007 by Tony McDonough, Liverpool Daily Post

BRITISH banking group Barclays yesterday denied failed debt vehicles had left it with an exposure potentially worth hundreds of millions of pounds.

The company’s investment arm, Barclays Capital, played down growing concerns that the highly-leveraged vehicles, known as SIV-lites, had left a hole in its finances.

Barclays Capital has been one of the most innovative players in the debt market, embracing the vehicles, which combine traditional structured investment vehicle (SIV) and collateralised debt obligation (CDO) technologies.

SIV-lites, however, have increasingly become a focus of investor concern amid recent debt market turmoil that has hit the value of assets underpinning the deals and that has led to short-term funding for them drying up.

Worries this week have focused on an SIV-lite structured and marketed by Barclays Capital for stricken German lender SachsenLB. BarCap, however, said yesterday that it provided no funding for the vehicle, Sachsen Funding 1.

A source familiar with the structure said Sachsen Funding 1 included a facility whereby Barclays could be tapped for cash if the vehicle ran into trouble, but added that had not happened.

Rating agency Standard & Poor's has only rated five SIV-lites. Of these, two have been downgraded steeply, two are on rating watch negative and one has been affirmed. All of the four on which negative action has been taken were arranged by Barclays Capital.

It is liquidity provider to Golden Key and Mainsail II, both of which are selling assets and to Cairn High Grade Funding I, where it worked alongside Danske Bank.

The Sachsen Funding programme provides for issuance of up to £2.25bn of commercial paper and £225m of notes, according to data from S&P. It was rated in April 2007.

Barclays, which employs around 800 people at its Barclaycard division in Liverpool, saw its shares fall slightly as trading opened yesterday.

“Typically, Barclays is a liquidity provider to the SIV-lites it has structured and it appears that Barclays is able to withdraw its committed credit line should the (net asset value) of the SIV-lite fall by more than 10%,” Royal Bank of Scotland credit analysts said in a note.

“However, it remains debatable whether Barclays would actually do this and, regardless, the exposure it retains is material.”

Jitters over SIV-lites came after a turbulent week which saw the resignation of BarCap’s head of European CDOs, Edward Cahill, whose team has been instrumental in developing SIV-lites.

Worries over Barclays' exposure to SIVs comes as the bank nears the end of the battle to win control of Dutch bank ABN AMRO, with its falling share price potentially fatal to efforts to secure the biggest banking takeover to date.

An almost 14% drop in Barclay's share price since the start of July has widened the gap between its mostly shares offer and a rival Royal Bank of Scotland-led bid to more than £7.5bn.

STERLING eased against the dollar, the euro and the yen yesterday as renewed weakness in global equity markets kept investors cautious about risky carry trade investments in the high-yielding pound.

A sell off in US equities on Monday and the consequent weakness in Asian and European bourses put the spotlight back on risk aversion which had been calmed somewhat by central banks worldwide pumping cash into the banking system.

In foreign exchange markets, risk aversion tends to prompt investors to exit risky carry trade positions where purchases of high-yielders like sterling are funded by cheap borrowing in currencies such as the yen.

tonymcdonough@dailypost.co.uk