Barclays 2007 Annual Report Download - page 67

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Business review
Financial review
Off-balance sheet arrangements
Barclays PLC Annual Report 2007 65
In the ordinary course of business and primarily to facilitate client
transactions, the Group enters into transactions which may involve
the use of off-balance sheet arrangements and special purpose entities
(SPEs). These arrangements include the provision of guarantees, loan
commitments, retained interests in assets which have been transferred to
an unconsolidated SPE or obligations arising from the Group’s involvements
with such SPEs.
Guarantees
The Group issues guarantees on behalf of its customers. In the majority
of cases, the Group will hold collateral against the exposure, have a right of
recourse to the customer or both. In addition, the Group issues guarantees
on its own behalf. The main types of guarantees provided are: financial
guarantees given to banks and financial institutions on behalf of customers
to secure loans: overdrafts; and other banking facilities, including stock
borrowing indemnities and standby letters of credit. Other guarantees
provided include performance guarantees, advance payment guarantees,
tender guarantees, guarantees to Her Majesty’s Revenue and Customs
and retention guarantees. The nominal principal amount of contingent
liabilities with off-balance sheet risk is set out in Note 34 and in the table
on page 60.
Loan commitments
The Group enters into commitments to lend to its customers subject to
certain conditions. Such loan commitments are made either for a fixed
period, or are cancellable by the Group subject to notice conditions.
Information on loan commitments and similar facilities is set out in
Note 34 and in the table on page 60.
Special purpose entities
Transactions entered into by the Group may involve the use of SPEs.
SPEs are entities that are created to accomplish a narrow and well defined
objective. There are often specific restrictions or limits around their
ongoing activities.
Transactions with SPEs take a number of forms, including:
– The provision of financing to fund asset purchases, or commitments
to provide finance for future purchases.
– Derivative transactions to provide investors in the SPE with a specified
exposure.
– The provision of liquidity or backstop facilities which may be drawn upon
if the SPE experiences future funding difficulties.
– Direct investment in the notes issued by SPEs.
Depending on the nature of the Group’s resulting exposure, it may
consolidate the SPE on to the Group’s balance sheet. The consolidation
of SPEs is considered at inception based on the arrangements in place
and the assessed risk exposures at that time. In accordance with IFRS,
SPEs are consolidated when the substance of the relationship between
the Group and the entity indicates control. Potential indicators of control
include, amongst others, an assessment of the Group’s exposure to the
risks and benefits of the SPE. The initial consolidation analysis is revisited
at a later date if:
(i) the Group acquires additional interests in the entity;
(ii) the contractual arrangements of the entity are amended such that
the relative exposures to risks and rewards change; or if
(iii)the Group acquires control over the main operating and financial
decisions of the entity.
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 Group’s involvement with unconsolidated third party conduits,
collateralised debt obligations and structured investment vehicles is
described further below.
Collateralised Debt Obligations
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 in 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 2008 has been assessed and included in the determination
of impairment charges and other credit provisions (£782m in relation
to ABS CDO Super Senior and other credit market exposures for the year
ended 31st December 2007).
The Group’s exposure to ABS CDO Super Senior positions before hedging
was £6,018m as at 31st December 2007. This includes £1,149m of undrawn
facilities provided to mezzanine transactions (exposure stated net of
writedowns and charges). Undrawn facilities provided to unconsolidated
CDOs are included as part of commitments in Note 34 to the accounts.
The remaining £4,869m is the Group’s exposure to High Grade CDOs,
stated net of writedowns and charges. £3,782m of drawn balances are
included within loans and advances on the balance sheet, with the
remaining £1,087m representing consolidated High Grade CDOs
accounted for on a fair value basis.
Collateral
The collateral underlying unconsolidated CDOs comprised 77% residential
mortgage backed securities, 6% non-residential asset backed securities
and 17% in other categories, including 10% ABS CDO exposure (a
proportion of which will be backed by residential mortgage collateral).
The remaining Weighted Average Life (WAL) of all collateral is 3.9 years.
The combined Net Asset Value (NAV) for all of the CDOs was £2.8bn
below the nominal amount, equivalent to an aggregate 40.2% decline
in value on average for all investors.
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. On mezzanine
CDOs, this portion of the capital structure is unfunded, but a liquidity
facility is provided to support the level of synthetic instruments within
each transaction. The senior portion covered by liquidity facilities is on
average 79% of the capital structure.
The initial WAL of the notes in issue averaged 7.1 years. The full contractual
maturity is 37.8 years.