Barclays Denies Exposure to Failed Debt Vehicles


British bank Barclays denied a report on Tuesday that it has several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.

Barclays Capital has been one of the most innovative players in the debt market, embracing highly leveraged investment vehicles known as SIV-lites, which combine traditional structured investment vehicle (SIV) and collateralized debt obligation (CDO) technologies.

SIV-lites, however, have become a focus of investor jitters in recent weeks after credit market turmoil hit the value of assets underpinning the deals and led to short-term funding for them drying up.

"To say we have hundreds of millions of dollars of exposure to SIV-lites generally is inaccurate," a spokesman for the bank said, dismissing a report in the Financial Times.

The newspaper said Barclays could face "several hundred million dollars" of exposure to SIV-lites arranged by BarCap that have run into trouble as a result of credit turbulence.

The author of the Financial Times report, Peter Thal Larsen, told CNBC Europe's "Power Lunch" that he stood by the story. "We reported that figure, we were absolutely certain that this is an accurate portrayal of the current position," he said.

Larsen added that analysts' comments following the story showed they were not worried about Barclays' exposure, as the bank's huge assets and hefty profits were more than reassuring.

Other Banks May Follow

He added that, although Barclays had been singled out this time, other banks which got involved in structuring these investment vehicles and had exposure to their failure may follow.

Banks across Europe have been hit by worries over their exposure to complex debt structures including SIV-lites and worries this week have focused on a SIV-lite structured by BarCap for stricken German lender SachsenLB, which is being sold to rival LBBW.

Barclays said on Tuesday it provided no funding for the vehicle, Sachsen Funding 1.

A source familiar with the structure said Sachsen Funding 1 includes a facility whereby Barclays can be tapped for cash if the vehicle runs into trouble, but added that has not happened.

However, analysts remained concerned.

"Typically Barclays is a liquidity provider to the SIV-lites it has structured and it appears that Barclays is able to withdraw its committed credit line should the (net asset value) of the SIV-lite fall by more than 10%," Royal Bank of Scotland credit analysts said in a morning note.

"(It) remains debatable whether Barclays would actually do this and regardless the exposure it retains is material."

Credit Jitters

Shares in the bank fell nearly 3% to 592.5 pence on Tuesday, compared to a 1.4% drop in the FTSE-100 index.

"It just doesn't feel like enough people have come out and said they've lost money as a result of the credit turmoil," one banking industry analyst said. "If we don't know who's got the toxic waste, it could be anyone."

Worries about SIV-lites on Tuesday, as Britain returns from a long weekend, come after a turbulent week which saw the resignation of BarCap's head of European CDOs, Edward Cahill, whose team has been instrumental in developing SIV-lites.

SIV worries have also hit other U.K. banks. Asia-focused Standard Chartered's shares were battered on Friday on rumors of pressure on an SIV it sponsored.

Standard Chartered dismissed concerns, saying the SIV, Whistlejacket Capital, is triple-A rated and its exposure is limited to its investment in the fund of around $250 million.

Rating Watch

Rating agency Standard & Poor's has only rated five SIV-lites. Of these, two have been downgraded steeply, two are on rating watch negative and one has been affirmed.

All four on which negative action has been taken were arranged by Barclays Capital.

It is liquidity provider to Golden Key and Mainsail II -- both of which are selling assets -- and to Cairn High Grade Funding I, where it worked alongside Danske Bank.

The Sachsen Funding program provides for issuance of up to $4.55 billion of commercial paper and $450 million of notes, according to data from S&P. It was rated in April 2007.

Worries over Barclays' exposure to SIVs comes as the bank nears the end of the battle to win control of Dutch bank ABN Amro -- with its falling share price potentially fatal to efforts to secure the biggest banking takeover to date.

A more than 14% drop in Barclay's share price since the start of July has widened the gap between its mostly shares offer and a rival Royal Bank of Scotland-led bid to almost 12 billion euros ($16.40 billion).

At current market prices, its mostly shares offer is worth 31.8 euros per ABN share. The RBS-led offer, more than 90% in cash, is worth 38.1 euros per ABN share. ABN shares were trading at around 33.5 euros on Tuesday morning.

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