Barclays joined in the market’s pre-Christmas flurry with two major securitisations, including a supersized $5bn collateralised loan obligation. Edward Russell-Walling reports.

If international securitisations got off to a slow start in 2005, they ended the year at full throttle, as European banks rushed to tidy up their balance sheets before the Christmas holidays. Notable among them was Barclays, with two jumbo deals, including a record-breaking £5bn collateralised loan obligation (CLO).

Barclays had ventured into the capital markets on a number of occasions in 2005. Its need for capital was boosted not only by organic lending growth, but also by its purchase of a majority stake in South Africa’s Absa Group for £2.9bn.

In the course of various capital-raising sorties during the year, Barclays sold just under £2bn in preference stock and another £1.5bn in lower Tier 2 paper. It serially moved about £4bn in securitised credit card receivables off its balance sheet and, in two separate transactions, securitised £1bn-worth of Spanish residential mortgages held by a Spanish subsidiary.

Special purpose vehicle

More than half its funding for the year, however, was completed in the three weeks before Christmas via two very large issues. The first was a corporate loan securitisation issued by a Barclays special purpose vehicle, Lambda Finance, as Gracechurch Corporate Loan Series 2005-1 (in memory, perhaps, of Barclays’ old City of London HQ on the corner of Gracechurch Street).

The £5bn issue followed hard on the heels of HSBC’s £2bn Metrix CLO in November and, like Metrix, the entire deal was placed in the bond market. This broke with the practice, common since the late 1990s, of securitising corporate loans via a leveraged synthetic structure, placing much of the deal privately with a single investor as an unfunded credit default swap. While such unfunded transactions have occasionally been bigger than the Barclays deal, the latter is thought to be the largest-ever public offering.

Barclays group treasurer Chris Grigg points out that both technology and appetite have moved on since the last public CLO issues. “There have been advances in the technology of repackaging these loans,” says Mr Grigg, who took up his job in October 2005. He was previously Goldman Sachs’ head of financial institutions for Europe.

Improved understanding

“With the systems that can now slice and dice [these loans], they can be sold quickly and relatively cheaply. Investment banks are better able to structure and price corporate loans in a way that investors and rating agencies are comfortable with. And investor understanding and demand has improved since that time,” he says.

After ‘slicing and dicing’, the loans were offered in different risk classes and currencies: US dollars, euro and sterling. The superjumbo size was not increased in response to demand, but had been set confidently in advance. “We were comfortable that it would be the right amount – and so it proved,” says Mr Grigg.

The issue was sole managed by Barclays Capital, helping it to narrow (but not close) the gap with Deutsche Bank as the year’s leading international bond bookrunner. After a three-week roadshow in Europe, the US and Asia, the triple-A notes were priced at price talk levels, at a slight premium to Metrix because of the larger size. The lower-rated tranches were priced at the tight end of the range, still at a premium. But such was the demand for the triple-B notes – several times oversubscribed – that these were priced inside the HSBC equivalent.

The virtue for Barclays of a fully funded structure is that it gives full capital relief. And, as the bank has made clear, this was an exercise aimed as much at capital relief as at risk transfer. Expect more.

Variety of tranches

The same was true of Barclays’ other big December deal, a £4.5bn securitisation of UK residential mortgages. Gracechurch Mortgage Funding was a standalone, true sale transaction and Barclays’ first UK retail mortgage-backed security issue since 1993. It was also repackaged in tranches of varying risk and currency – though unlike the Lambda issue, the credit spread did not vary according to currency, with one exception.

“This is not once in a lifetime stuff and we anticipate that we will continue to be users of the securities markets, in two ways,” says Mr Grigg. “One is to provide ourselves with various forms of regulatory capital. The other is to become more efficient from a capital perspective. If you look at the amount that we have securitised so far, it’s a smaller proportion of our balance sheet than for many others.

“So we have room for manoeuvre,” he concludes. “But we do not have to do it and if market conditions were bad, we would not.”

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