Not everything that has happened to Barclays in the past few years has been positive. But behind the scenes, the UK financial services group is gaining a clear reputation for the growing sophistication of its capital and balance-sheet management. Two recent deals, both linked to balance-sheet management, have greatly enhanced the bank’s reputation, both as a borrower and as an innovative deal maker.
In November 1999, Barclays secured the largest European credit card securitization to date via Barclays Capital. Although this was Barclays’ first credit card securitization for its Barclaycard business, this did not stop the bank from wading into the market to set a new benchmark for securities backed by European credit-card receivables. Rather than issue into Europe’s fledgling asset-backed market, Barclays headed straight for the most liquid market for asset-backed securities in the US. The resulting deal, a $1 billion three-year soft bullet, was of a similar size to transactions by US credit-card companies that form the bedrock of the US asset-backed market. Although Barclays went first to the US markets, the innovative new structure of the deal, which borrowed some mechanics from MTN programme structures, will allow the issuer to follow up with deals in other currencies.
The deal was a trailblazer in several respects. In the past few years, European credit-card securitization deals have largely been overlooked by European financial companies. But this and other securitization deals by Barclays have sent a powerful signal to large European Wnancial institutions of the advantages of active balance-sheet management through securitization.
Barclays has in fact been at the forefront of securitization for more than a decade, issuing three mortgage-backed securities worth £766 million and a £280 million bond backed by unsecured consumer loans between 1989 and 1994.
But Barclays’ balance-sheet management goes much further than taking assets oV the balance sheet and the bank has invested a lot of time and energy in matching its capital to its foreign liabilities. Says Hugh Graham, deputy group treasurer at Barclays: “The process of using foreign currency capital to match foreign liabilities and hedge against exchange rate volatility began in the 1980s, but the advent of the euro has provided us with an enormous capability to develop this process further.”
In this context, Barclays’ tier-one transaction that came to the market in mid-April was one of the most innovative deals of the past few years. Not only did Barclays Bank set a new record in tier-one transactions in the euro sector with a e850m deal via Barclays Capital, it did so at a time when similar deals were competing for capital.
In the wake of the deal, Barclays believes it has found a superior structure for tier-one issues by UK institutions. Investors particularly liked the simplicity of a deal that avoided special purpose vehicles used in the previous seven UK tier-one issues, and that gave them direct access to the issuer’s credit.
By using the simpler Reserve Capital Instrument structure, and avoiding unnecessary complexity, Barclays shaved about 20 basis points of its funding costs, with the prospect of larger savings on future issues once investors have fully understood the benefits. One of the advantage for investors is that reserve capital instruments are bearer bonds rather than perpetual preference shares. Investors have the added security that the instruments will remain bearer bonds and cannot be converted into any other form of security.
