Standard & Poor’s Ratings Services said that its ratings on Barclays Bank PLC (Barclays; AA/Stable/A-1+) are not affected by recent reports concerning exposures to Structured Investment Vehicles (SIVs). Our ratings on Barclays benefit from its broad and diversified range of businesses and are not expected to be affected by its other exposures to specialist funding vehicles, notably its U.S. ABCP programs, or its activities in the RMBS and leveraged finance markets. That said, if the current heavily discounted valuations of even highly rated MBS persist, banks and broker-dealers including Barclays could face substantial mark-to-market losses. Fair-value accounting will likely make such losses more visible than might have been the case historically. Standard & Poor’s therefore continues to monitor the situation closely, although rating actions on large banks and broker-dealers are considered unlikely at present.
In recent days, Barclays has been cited by the financial press in connection with some structured investment vehicles, known as SIV-Lites, which are highly leveraged entities investing in ABS. Some of these have been subject to recent rating actions.
Barclays, through its investment-banking business, Barclays Capital, was instrumental in the creation of SIV-Lites and as such has potential exposure to some of these entities via liquidity lines acting as backstops to their CP issuance programs. Currently, we estimate CP outstanding for Golden Key Ltd., Mainsail II Ltd., Cairn High Grade Funding I Ltd, and Sachsen Funding I Ltd. totals less than $11 billion. However, Standard & Poor’s believes that liquidity lines provided by Barclays cover only a small proportion of this outstanding CP. Moreover, the risks to Barclays in extending backstop lines to the SIV-Lites are mitigated in part by the credit enhancement within the structures. We therefore consider that the potential losses to Barclays in the event of a winding up are unlikely to be material in the group context.
Standard & Poor’s also notes that Barclays is a sponsor of, and liquidity provider to, several large ABCP conduits in the U.S. By far the largest is its multiseller conduit, Sheffield Receivables Corp., with about $22 billion of CP outstanding at end-June 2007. Two other conduits, Surrey Funding Corp. and Stratford Receivables Co. Ltd., had outstanding CP of about $3.7 billion and $9 billion, respectively. So far, we believe that the great majority of the maturing CP of these conduits is being refinanced in the markets. However, we consider that should such funding dry up entirely, Barclays has both the liquidity and capital capacity to fund these conduits directly.
Barclays has exposure to the U.S. subprime market within its Barclays Capital business, having acquired a specialist subprime mortgage originator, EquiFirst Corp., earlier this year, and through its broader activities in the RMBS markets. Standard & Poor’s believes that Barclays’ exposure to the more troubled 2006 subprime vintages is now small, having subsequently reduced its warehouse lines significantly. At the moment, we consider that all investment-banking operations are susceptible to significant negative mark-to-market losses on such exposures and other RMBS holdings. The extent of such losses depends on how quickly a market consensus forms on the intrinsic value of such securities and hence how quickly liquidity returns to the ABS markets. Similarly, Barclays’ prominent role in leveraged finance markets suggests that it holds or is committed to take on leveraged loans, which cannot currently be sold to investors without taking a loss.
Currently, we believe that investment banks like Barclays Capital should be able partially to offset such mark-to-market losses thanks to flexible staff compensation arrangements, but even so our ratings in general anticipate that the second half of the year for investment banking and trading is likely to be significantly worse than the first half. (For more information, see “Investment Banking And Trading: Stressing For A Tougher Environment,” published on Aug. 28, 2007.) Furthermore, Barclays benefits from a broad and diversified range of businesses, diluting potential volatility from its capital markets operations. Rating actions are considered unlikely at present, but our ratings could be affected by unexpectedly large losses, a material failure of risk controls, or a more prolonged downturn into 2008.
