• Barclays spins off troublesome loans to Cayman Islands fund
• Former Barclays Capital staff will manage the toxic assets
Two top bankers are leaving Barclays to manage a fund in the Cayman Islands that is buying $12.3bn (£7.47bn) of the bank's most troublesome assets.
The deal was criticised by analysts who questioned its complexity, but it will enable the British bank to report a more stable performance in future. Throughout the financial crisis, Barclays has been forced to defend the way it was pricing and accounting for these troublesome assets and is now hoping to smooth out the effect of the investments on its profits.
The assets will not actually be removed from the bank's balance sheet for regulatory purposes but the accounting treatment will be changed, allowing Barclays to avoid taking further big hits by no longer needing to price its assets at current market values through the convention known as "mark to market".
Under the deal terms , Stephen King and Michael Keeley will set up C12 Capital Management which, while based in New York, will manage the new Cayman Islands-registered fund Protium and buy the assets from Barclays.
The pair are leading a team of 45 traders who are leaving Barclays Capital, the investment banking arm of the bank, to join C12. It will receive an annual management fee of $40m from the bank to look after the loans, which have turned toxic since the credit crunch.
The complexity of the transaction surprised analysts at a time when the regulators had been calling for more clarity in the structure on banks. Others expressed astonishment that the Financial Services Authority had sanctioned such a deal.
Protium will be funded by $450m of working capital provided by two major investors in the US and other unnamed partners, as well as by a $12.6bn 10-year loan from Barclays itself. Analysts believe that the undisclosed backers of Protium should generate a lucrative return on their investment in the fund.
There was a sceptical response from analysts to a conference call with Barclays's finance director, Chris Lucas, who admitted that the bank might need to hold more capital as a result of the deal which in itself would not create a profit or a loss for the bank.
Credit Suisse analysts described the transaction as "a little strange" as Barclays appears to be giving up any benefit from the value of the assets. Ian Gordon, analyst at Exane BNP Paribas, said: "It's being presented as providing a more stable, certain outturn, but you could argue they are giving away the upside but not really being sheltered from much of the downside."
The $12.3bn of assets being sold to Protium forced Barclays to record a £1bn loss in 2008 and include residential mortgage assets, collateralised debt obligations and other complex financial instruments at the heart of the credit crunch.
Analysts had predicted the bank would incur further writedowns on the loans, two-thirds of which are insured by monoline insurers, which became well known during the credit crisis for having provided insurance to some of the complex instruments that are now under water.
The bank will remain exposed to the cash flow on the assets through the $12.3bn 10-year loan from which Barclays expects to make $3.9bn of profit on interest payments. The loan could become impaired if the cash flow of the assets is affected by any falls in value.
Lucas said: "We are not seeking through the transaction to effect a change to our underlying credit-risk profile. But 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. We also bring in investors with an appetite for the cash flows arising from the assets."
"For Barclays, this represents a good opportunity to create greater predictability of income and economic capital utilisation," Lucas said.
Barclays shares closed at 380p, up 3%.
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