Barclays shouldn’t vendor-finance iShares

May 11, 2009

REUTERS— Margaret Doyle is a Reuters columnist. The opinions expressed are her own —

Barclays’ hasty deal to sell iShares in April served its purpose. The $4.4 billion price-tag boosted the bank’s capital, thereby allowing it to dodge the government’s insurance scheme. Barclays should now seek better terms on the deal.

A month is a long time in the markets. Barclays sensibly agreed with the purchaser, the private equity firm CVC Capital Partners, a “go shop” clause, allowing it to seek higher bids before June 18.
Several other parties have now entered the fray. With the markets storming higher, it should be possible for Barclays to improve on the CVC deal.

One way to do this would be to get a higher price, and this should be possible. But Barclays should also negotiate better financing terms. The current terms hark back to the “cov-lite” days of private equity, where banks extended credit without strict covenants.

Barclays is lending CVC 81 percent of the amount that the bank itself will receive.

By contrast, the employee-shareholders, who include Bob Diamond, head of Barclays Capital, are eligible to pick up a big part of their $520 million share of the sale in cash — in Diamond’s case, $9.8 million.

Barclays is going to have to whistle for some years.

Moreover, barely a quarter of the loan is secured. And almost half of the advance is a vendor loan that rolls up at just 7 percent — pretty juicy terms for an unsecured loan with a 10-year term.
Barclays has also pledged to keep more than half of this debt on its own books, (rather than syndicating it to other banks), for at least five years.

Even though credit markets are a little looser, Barclays can now get better returns on an advance of $3 billion than this deal offers.

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