Barclays unveils deal on risky assets

UK bank Barclays protected itself against wild swings in the price of complex credit products today by agreeing a US$12.3bn (€8.3bn) deal with former employees.

The bank is selling a third of its ’alphabet soup’ of products such as mortgage-backed bonds to a new fund run by C12 Capital Management – which is led by former staff of its investment banking arm, Barclays Capital.

The Protium fund is paying for the products with a $12.6bn (€8.5bn) from Barclays, which it will pay back with the cashflow generated from the assets it has bought.

While the products will remain on Barclays’ balance sheet for regulatory purposes, it has effectively swapped the risk of short-term volatility in their price through ’mark-to-market’ accounting for the risk of the 10-year loan.

Barclays’ finance director Chris Lucas – who expects interest repayments of $3.9bn (€2.65bn) over the course of the loan – said the deal would create “greater predictability”.

“We are restructuring a significant tranche of credit market exposures in a way that we expect will secure more stable risk-adjusted returns for shareholders over time.”

Protium, which is likely to be in the market for credit products from other banks, is betting on higher returns from the assets it has bought.

Excess cashflows on the assets above the repayment of the Barclays loan will go to Protium’s partners. At the end of the 10 years, excess cash in the fund will also go to the partners.

Barclays has so far weathered the financial crisis without the need for British taxpayer support. The firm – which sold its fund management arm for £8.2bn (€9.2bn) in June – made profits of £3bn (€3.4bn) in the first half of the year.