Barclays Plc (BCS) is contemplating to spin off a £4 billion portfolio of complex credit assets as part of the initiative to clean up its balance sheet and alleviate shareholder concerns over its risky investments.
The move is similar to the transaction it undertook last month with a £12.3 billion portfolio. The portfolio is made up of collateralized loan obligations (CLOs). CLOs are instruments that repackage portfolios of loans into tranches of different risks and returns.
Barclays could choose between two options for the sale of £4 billion of its toxic assets. It could either make a deal similar to the Protium deal which means that Barclays traders would leave the portfolio, or it could divest the whole to a third-party buyer.
Barclays seems more interested in a third-party transaction as CLO valuations have leapfrogged in recent months. A number of other banks worldwide − including Belgium’s Fortis (FORB), France’s Natixis and a number of German banks − are also in the market looking for similar deals.
If Barclays opts for a similar course of action for its CLO portfolio that it did for Protium, it might spur some controversy. The Protium deal was criticized as being a mere means to obscure the performance of the underlying assets. Barclays is still exposed to the risk as its sale is backed by a loan on the balance sheet. Hence, loan repayments could be jeopardized if the underlying assets deteriorate further. However, Barclays believes that the Protium structure gives it safer and more regular cash flows and frees it from the risk arising from the write-down of the assets.
Several banks including Citigroup Inc. (C) have been concerned about investor sentiment over the continuing risk posed by toxic assets on their balance sheets. During the second quarter of 2009, Citigroup reported results separating the firm into Citicorp and Citi Holdings. The company is currently undergoing a major restructuring in its businesses and plans to hold down its assets and divest non-core businesses in Citi Holdings.
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