Barclays 2011 Annual Report Download - page 272

Notes to the financial statements
For the year ended 31 December 2011 continued
44 Off-balance sheet arrangements continued
A number of the Group’s transactions have recourse only to the assets of unconsolidated SPEs. Typically, the majority of the exposure to these assets is
borne by third parties and the Group’s risk is mitigated through over-collateralisation, unwind features and other protective measures.
The business activities within the Group where SPEs are used include multi-seller conduit programmes, asset securitisations, client intermediation,
credit structuring, asset realisations and fund management. These activities are described below. In addition, later sections provide quantitative
information on the Group’s involvements with CDOs, SIVs, SIV-Lites and conduits.
Multi-seller conduit programmes
Barclays creates, administers and provides liquidity and credit enhancements to several commercial paper conduit programmes, primarily in the United
States. These conduits provide clients access to liquidity in the commercial paper markets by allowing them to sell consumer or trade receivables to the
conduit, which then issues commercial paper to investors to fund the purchase. The conduits have sufficient collateral, credit enhancements and
liquidity support to maintain an investment grade rating for the commercial paper.
Asset securitisations
The Group has assisted its customers with the formation of asset securitisations, some of which are effected through the use of SPEs. These entities
have minimal equity and rely on funding in the form of notes to purchase the assets for securitisation. As these SPEs are created for other companies,
the Group does not usually control these entities and therefore does not consolidate them. The Group may provide financing in the form of senior notes
or junior notes and may also provide derivatives to the SPE. These transactions are included on the balance sheet.
The Group has also used SPEs to securitise part of its originated and purchased retail and commercial lending portfolios and credit card receivables.
These SPEs are usually consolidated and derecognition only occurs when the Group transfers its contractual right to receive cash flows from the
financial assets, or retains the contractual rights to receive the cash flows, but assumes a contractual obligation to pay the cash flows to another party
without material delay or reinvestment, and also transfers substantially all the risks and rewards of ownership, including credit risk, prepayment risk and
interest rate risk. The carrying amount of securitised assets together with the associated liabilities are set out in Note 43.
Client intermediation
The Group has structured transactions as a financial intermediary to meet investor and client needs. These transactions involve entities structured by
either the Group or the client and are used to modify cash flows of third party assets to create investments with specific risk or return profiles or to
assist clients in the efficient management of other risks. Such transactions will typically result in a derivative being shown on the balance sheet,
representing the Group’s exposure to the relevant asset. The Group also invests in lessor entities specifically to acquire assets for leasing. Client
intermediation also includes arrangements to fund the purchase or construction of specific assets (most common in the property industry).
Credit structuring
The Group structures investments to provide specific risk profiles to investors. This may involve the sale of credit exposures, often by way of derivatives,
to an entity which subsequently funds those exposures by issuing securities. These securities may initially be held by Barclays prior to sale outside of
the Group.
Asset realisations
The Group establishes SPEs to facilitate the recovery of loans in circumstances where the borrower has suffered financial loss.
To the extent that there are guarantees and commitments in relation to SPEs the details are included in Note 30.
Collateralised debt obligations (CDOs)
The Group has structured and underwritten CDOs. At inception, the Group’s exposure principally takes the form of a liquidity facility provided to
support future funding difficulties or cash shortfalls in the vehicles. If required by the vehicle, the facility is drawn with the amount advanced included
within loans and advances on the balance sheet. Upon an event of default or other triggering event, the Group may acquire control of a CDO and,
therefore, be required to fully consolidate the vehicle for accounting purposes. The potential for transactions to hit default triggers before the end of
2011 has been assessed and is included in the determination of a £6m impairment charge (2010: £137m release) in relation to ABS CDO Super Senior
and other credit market exposures for the year ended 31 December 2011.
The Group’s exposure to ABS CDO Super Senior positions before hedging was £1,842m as at 31 December 2011 (2010: £1,992m), equivalent to an
aggregate 51.68% (2010: 50.97%) decline in value on average for all investors. This represents the Group’s exposure to High Grade CDOs, stated net of
write downs and charges. These facilities are fully drawn and included within loans and advances on the balance sheet.
Collateral
The collateral underlying unconsolidated CDOs comprised 78% (2010: 78%) residential mortgage-backed securities, 2% (2010: 3%) non-residential
asset-backed securities and 20% (2010: 19%) in other categories (a proportion of which will be backed by residential mortgage collateral). The
remaining Weighted Average Life (WAL) of all collateral is 7.41 years (2010: 6.25 years). The combined Net Asset Value (NAV) for all of the CDOs was
£1bn (2010: £1bn).
Funding
The CDOs were funded with senior unrated notes and rated notes up to AAA. The capital structure senior to the AAA notes on cash CDOs was
supported by a liquidity facility provided by the Group. The senior portion covered by liquidity facilities is on average 82% of the capital structure. The
initial WAL of the notes in issue averaged 6.7 years (2010: 6.7 years). The full contractual maturity is 38.2 years (2010: 38.2 years)
270 Barclays PLC Annual Report 2011 www.barclays.com/annualreport