Barclays Plans $1.7 billion Bond as Funding Thaws

LONDON, Oct 21 (Reuters) - British bank Barclays is close to issuing a 3-year note to raise at least 1 billion pounds ($1.7 billion), adding to signs that government rescue plans are thawing funding markets.

Britain's second biggest bank may also moderate the pace of its retail banking expansion in India, Pakistan and Russia and shrink the asset book of the Lehman Brothers U.S. business it bought last month amid tighter capital requirements.

Analysts at Cazenove said in a note on Tuesday Barclays will become more selective on investments and assets as banks are urged to preserve and raise capital. Cazenove hosted a lunch with Barclays' Finance Director Chris Lucas and investors on Monday, and a spokesman for the bank confirmed the details in the note were accurate. Cazenove said Barclays is close to issuing the bond under the UK government's guarantee.

"Though early days, there are the first signs that sentiment in the debt market is improving consistent with the falls in Libor rates from their highs," said analysts at Cazenove, which is house broker to the British bank.

Barclays' ability to issue unsecured funding with a term of more than a week has also improved and after falling to 1 to 2 billion pounds on some days is now up to as much as 10 billion pounds daily, Cazenove said. At that level of issuance Barclays can broadly maintain its funding maturity profile, it added.

The interbank cost of borrowing dollars fell sharply on Monday as banks grew more confident of lending rather than hoarding cash, raising optimism a global money market freeze is reacting to action by central bankers to improve liquidity.

London interbank offered rates (Libor) for three month dollars fell by almost half a percentage point. Britain provided 37 billion pounds to recapitalise a trio of lenders last week and also to provide sufficient liquidity for banks which all have agreed to boost their capital even if they are not selling shares to the government. Barclays aims to raise capital privately.

Cazenove said it expects the bank is considering a range of instruments to raise capital, not just preference shares. The bank will temper its investment plans under the new capital regime and "become more selective on investments and look harder at returns from risk assets," Cazenove said.

Barclays now expects the Lehman Brothers unit it bought to end 2008 with about $15 billion of risk weighted assets, Cazenove analysts said. Barclays bought trading assets worth about $72 billion under its Lehman acquisition.

Barclays is also not expected to retain the full 10,000 staff that came with the deal, Cazenove said. The analysts said Barclays "will moderate the pace of expansion" in its retail and commercial banking, particularly "the higher risk markets of India, Pakistan and Russia".

(Additional reporting by Natalie Harrison; Editing by David Holmes and David Cowell) ($1=.5847 Pound) vs COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved.

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