Barclays announced today that it is selling $12.3 billion of credit market assets Protium Finance LP at their current “fair value,” which means that Barclays will record neither a loss or a gain on the sale of the assets.
But here’s the thing: Protium is a highly leveraged, brand new company almost entirely financed by Barclays. It has $450 million in capital supplied by the unnamed partners in Protium and a 10-year, $12.6 billion loan from Barclays. It pays interest at just 275 basis points over Libor. And that loan will be secured by the very assets Barclays is selling to Protium.
It boggles the mind. What could be the purpose of this kind of transaction? We imagine that it’s mainly some kind of accounting arbitrage. Barclays will limit its direct downside exposure from the assets, which we suspect are mainly toxic assets acquired from Lehman Brothers. Barclays describes them as “structured credit assets insured by monolines ($8.2 billion), RMBS/Other ABS assets ($2.3 billion) and residential mortgage assets ($1.8 billion) held in Barclays Capital.”
How would Barclays get an accounting benefit from this? Right now Barclays is required to mark the assets to market, meaning it must record write-downs when the assets drop in value. By transferring the assets to Protium, Barclays is able to stabilise the accounting treatment at their current value. Further declines in value will not immediately get passed on to Barclays. It will only have to record a loss if the value declines so much that it concludes Protium cannot pay off the loss.
Of course, in the real world, Barclays has just as much exposure to declines in value of the assets as it did before. This is probably why Barclays says the assets will stay on balance sheet for regulatory purposes–meaning they still have to reserve against the assets. But for accounting purposes Barclays can pretend it isn’t still exposed to those asset values.
Because reserve requirements on structured credit assets are so low, the cost of keeping them on balance sheet for regulatory purposes is quite low. The real benefit here is not have to report write-downs to shareholders.
This can be looked at as Barclays taking a short-term bearish and long-term bullish outlook on the value of the assets. The move protects Barclays from short-term losses on the assets. But if they continue to lose value over the long-term, Barclays will eventually have to report that Protium is unlikely to be able to pay off its loan. Or maybe they’re just crossing their fingers and hoping that when they do have to take the loss from Protium’s default on the loan, we’ll be far enough out of the financial crisis that it won’t be such a big deal.
(via Wall Street Journal)
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