New Hedge Fund Buys Barclays Toxic Assets With $12.6B Loan From Barclays

Date: Friday, September 18, 2009
Author: FINalternatives

A group of 45 Barclays bankers have left the British banking giant to found their own hedge fund, which has in turn agreed to buy more than $12 billion in toxic assets from Barclays, primarily with Barclays’ own money.

New York-based C12 Capital Management, headed by former Barclays executives Stephen King and Michael Keeley, have set up a new Cayman Islands-registered hedge fund, Protium Finance. While the firm has raised $450 million in new money—most of it from a pair of other hedge funds, one based in the U.S. and the other in the U.K.—most of the deal will be financed by a $12.6 billion loan from Barclays.

While many banks have sought to sell of their toxic debt—finding buyers, in many cases, only at bargain-basement prices—in an effort to remove the muck from their balance sheets, Barclays says the deal won’t actually shield it from much risk. The bad assets remain on its balance sheet, and the bank remains liable should Protium default; it’s equity cushion is just $16 million. But Barclays, which has also given up on any possible uptick in the value of the securities, says the interest paid by Protium, Libor plus 2.75%, promises steadier returns. And Protium did pay fair-market value for the debt, although its fair-market value isn’t what it used to be.

The portfolio sold by Barclays includes $8.2 billion in bond insurer-linked assets and $1.8 billion in residential mortgage-linked assets.

“This represents a good opportunity to create greater predictability of income and economic capital utilization,” Chris Lucas, Barclays CFO, said. “It’s part of our ongoing progress to manage and reduce risk.” Critics call it cosmetic accounting and exotic financial engineering.

For their part, the C12 founders are likely to enjoy a decade’s worth of big paydays. The firm is set to earn management fees of $40 million a year for the next 10 years, and if it can actually squeeze a return from the rotten debt, could earn millions more. The creation of the new firm could also shield its executives and employees from any strict pay or bonus caps imposed by regulators on big financial institutions, such as Barclays.

The new hedge fund’s hedge fund backers are set to earn fixed interest of 7% for 10 years, and are also entitled to any surplus cash left in the fund if Barclays is repaid in full.