Barclays Copes With a Stall In Cash Engine
The engine behind Barclays PLC's growth and a major reason the British bank has the fuel to bid for Dutch bank ABN Amro Holding NV is its capital-markets business. When Barclays needed extra cash last month to fend off a European consortium also bidding for ABN, Barclays Capital helped bring in investors from China and Singapore. The unit reported a 33% increase in six-month pretax profit compared with the same period a year earlier.
But over the past two weeks, the Barclays Capital machine has sputtered. On Friday, the unit said it is providing $1.6 billion in financing to an investment vehicle it helped set up last year that had run into financial difficulties. Barclays Capital also is facing losses estimated at $400 million relating to investments in two Bear Stearns Cos. hedge funds that had bet heavily in the U.S. subprime-mortgage market.
Friday's bailout followed news a day earlier that its parent had been forced to tap a Bank of England lending facility because of technical difficulties with a securities-clearing system that meant it faced a shortfall at its central-bank account.
In an interview on Friday, Barclays President Robert Diamond Jr. acknowledged it has been a frustrating few weeks but said there were no big losses for investors to fear.
The problems have been one of several drags on Barclays's stock price. In London trading Friday, Barclays shares rose 16 pence (32 cents) to 614 pence, but the stock is down 12% for August.
It's also off 11% since mid-March, when the bank and ABN announced they were in talks over a deal valued at €61 billion, or $83 billion. That means the stock price is far below the 800-pence price that would put Barclays's offer on par with that of a bank consortium led by Royal Bank of Scotland Group PLC, whose bid is valued at €71 billion.
A decision by ABN shareholders could come in October.
Mr. Diamond joined the bank in the summer of 1996 and helped turn Barclays Capital into a business that contributes about 40% of Barclays's profit and competes aggressively with Wall Street firms in the debt markets.
But Barclays's expertise in structuring and financing complex products or affiliates for clients has come back to haunt the bank. The capital-markets unit helped set up and finance for hedge funds and banks a type of structured investment vehicle known as an SIV-lite. But with the turmoil in credit markets, some vehicles have been unable to tap their main money source, the commercial-paper market. At the same time, there has been a sharp drop in the value of assets the structures owned.
On Aug. 21, ratings agency Standard & Poor's said it was downgrading the notes of structures called Mainsail II Ltd. and Golden Key Ltd. Separately, S&P said it had placed the notes of Sachsen Funding I Ltd. and Cairn High Grade Funding I Ltd. on CreditWatch with negative implications. Barclays helped arrange or finance all four, according to ratings-agency reports.
Barclays Capital on Friday said it agreed to provide Cairn High Funding I with the $1.6 billion of funding, which the bank says it has hedged. The move relieves pressure on Cairn, an affiliate of a London money manager, and means the structure doesn't have to unload its assets, which are securities tied to U.S. residential mortgages, at a time when there are few buyers.
Barclays officials say Barclays Capital is working with two of the other structured vehicles -- Mainsail II, an affiliate of a London hedge fund, and Golden Key, an affiliate of a Geneva money manager -- but no deal is imminent.
What has been the biggest surprise is that a bank skilled at structuring the most complex products is getting tripped up by the daily plumbing of banking. Twice in the past two weeks, the bank has had to tap a little used Bank of England credit line to cover shortfalls.
The so-called standing lending facility has been used more than a dozen times since May 2006. Investors are hypersensitive to its use because it could signal a bank is having funding problems. On Thursday, news surfaced that one or more banks had tapped £1.6 billion on Wednesday, sending bank analysts and media on a chase to identify the borrowing party.
Barclays Capital now says that a breakdown at around 2 p.m. Wednesday at the securities-settling system operated by Euroclear SA meant that it didn't have enough time to see what trades had settled and then balance its books at the Bank of England. Because other banks also had the same troubles, they weren't willing to lend to Barclays so it could cover its shortfall. On Wednesday afternoon, Barclays tapped the lending facility even though it says it is "flush with liquidity."
It borrowed most of the £1.6 billion taken that day, although other banks also tapped the line, according to people familiar with the situation. Still, no other bank has surfaced with problems.
But over the past two weeks, the Barclays Capital machine has sputtered. On Friday, the unit said it is providing $1.6 billion in financing to an investment vehicle it helped set up last year that had run into financial difficulties. Barclays Capital also is facing losses estimated at $400 million relating to investments in two Bear Stearns Cos. hedge funds that had bet heavily in the U.S. subprime-mortgage market.
Friday's bailout followed news a day earlier that its parent had been forced to tap a Bank of England lending facility because of technical difficulties with a securities-clearing system that meant it faced a shortfall at its central-bank account.
In an interview on Friday, Barclays President Robert Diamond Jr. acknowledged it has been a frustrating few weeks but said there were no big losses for investors to fear.
The problems have been one of several drags on Barclays's stock price. In London trading Friday, Barclays shares rose 16 pence (32 cents) to 614 pence, but the stock is down 12% for August.
It's also off 11% since mid-March, when the bank and ABN announced they were in talks over a deal valued at €61 billion, or $83 billion. That means the stock price is far below the 800-pence price that would put Barclays's offer on par with that of a bank consortium led by Royal Bank of Scotland Group PLC, whose bid is valued at €71 billion.
A decision by ABN shareholders could come in October.
Mr. Diamond joined the bank in the summer of 1996 and helped turn Barclays Capital into a business that contributes about 40% of Barclays's profit and competes aggressively with Wall Street firms in the debt markets.
But Barclays's expertise in structuring and financing complex products or affiliates for clients has come back to haunt the bank. The capital-markets unit helped set up and finance for hedge funds and banks a type of structured investment vehicle known as an SIV-lite. But with the turmoil in credit markets, some vehicles have been unable to tap their main money source, the commercial-paper market. At the same time, there has been a sharp drop in the value of assets the structures owned.
On Aug. 21, ratings agency Standard & Poor's said it was downgrading the notes of structures called Mainsail II Ltd. and Golden Key Ltd. Separately, S&P said it had placed the notes of Sachsen Funding I Ltd. and Cairn High Grade Funding I Ltd. on CreditWatch with negative implications. Barclays helped arrange or finance all four, according to ratings-agency reports.
Barclays Capital on Friday said it agreed to provide Cairn High Funding I with the $1.6 billion of funding, which the bank says it has hedged. The move relieves pressure on Cairn, an affiliate of a London money manager, and means the structure doesn't have to unload its assets, which are securities tied to U.S. residential mortgages, at a time when there are few buyers.
Barclays officials say Barclays Capital is working with two of the other structured vehicles -- Mainsail II, an affiliate of a London hedge fund, and Golden Key, an affiliate of a Geneva money manager -- but no deal is imminent.
What has been the biggest surprise is that a bank skilled at structuring the most complex products is getting tripped up by the daily plumbing of banking. Twice in the past two weeks, the bank has had to tap a little used Bank of England credit line to cover shortfalls.
The so-called standing lending facility has been used more than a dozen times since May 2006. Investors are hypersensitive to its use because it could signal a bank is having funding problems. On Thursday, news surfaced that one or more banks had tapped £1.6 billion on Wednesday, sending bank analysts and media on a chase to identify the borrowing party.
Barclays Capital now says that a breakdown at around 2 p.m. Wednesday at the securities-settling system operated by Euroclear SA meant that it didn't have enough time to see what trades had settled and then balance its books at the Bank of England. Because other banks also had the same troubles, they weren't willing to lend to Barclays so it could cover its shortfall. On Wednesday afternoon, Barclays tapped the lending facility even though it says it is "flush with liquidity."
It borrowed most of the £1.6 billion taken that day, although other banks also tapped the line, according to people familiar with the situation. Still, no other bank has surfaced with problems.
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