Barclays 2008 Annual Report Download - page 116

114 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08
Risk management
Credit risk management
Barclays Capital credit market exposures
B1. Commercial Mortgages (continued)
Commercial Mortgage Backed Securities (net of hedges)
As at As at Marksaat Marksaat
31.12.08 31.12.07 31.12.08 31.12.07
£m £m
AAA securities 588 1,008
Other securities 147 288
Total 735 1,296 21% 98%
Exposure is stated net of hedges traded in the liquid index swap market with market counterparties. The counterparty exposure is managed through a
standard derivative collateralisation process and none of the hedge counterparties are monoline insurers.
Exposures at 31st December 2008 included assets acquired from Lehman Brothers North American businesses of £143m in AAA securities and £86m in
other securities.
B2. CMBS Exposure Wrapped by Monoline Insurers
The deterioration in the commercial mortgage market has resulted in exposure to monoline insurers and other financial guarantors that provide credit
protection.
The table below shows Commercial Mortgage Backed Security (CMBS) assets where we held protection from monoline insurers at 31st December 2008.
These are measured at fair value through profit and loss. Declines in fair value of the underlying assets are reflected in increases in the value of potential
claims against monoline insurers. Such declines have resulted in net exposure to monoline insurers under these contracts increasing to £1,854m by
31st December 2008 (31st December 2007: £197m).
Claims would become due in the event of default of the underlying assets and losses would only be realised if both the underlying asset and monoline
defaulted. At 31st December 2008 all underlying assets were rated AAA/AA and 89% are wrapped by monolines with investment grade ratings.
There is some uncertainty whether all of the monoline insurers would be able to meet all liabilities if such claims were to arise: certain monoline insurers
have been subject to downgrades in 2008. Consequently, a fair value loss of £340m has been recognised in the year. There have been no claims due
under these contracts as none of the underlying assets were in default at 31st December 2008.
The fair value is determined by a credit valuation adjustment calculation which incorporates stressed cash flow shortfall projections, current market
valuations, stressed Probability of Default (PDs) and a range of Loss Given Default (LGD) assumptions. The cash flow shortfall projections are stressed to
ensure that we consider the potential for further market deterioration and resultant additional cash flow shortfall in underlying collateral. Monoline ratings
are based on external ratings analysis and where appropriate significant internal analysis conducted by the independent Credit Risk function. In addition,
we reflect the potential for further deterioration of monolines by using stressed PDs which results in all monolines having an implied sub-investment
grade rating. LGDs range from 45% to 100% depending on the monoline.
Exposure by credit rating of monoline insurer
As at 31.12.08
Fair value Credit
of underlying Fair value valuation Net
Notional asset exposure adjustment exposure
£m £m £m £m £m
AAA/AA 69 27 42 (4) 38
A/BBB 3,258 1,301 1,957 (320) 1,637
Non-investment grade 425 181 244 (65) 179
Total 3,752 1,509 2,243 (389) 1,854
As at 31.12.07
AAA/AA 3,614 3,408 206 (9) 197
The notional value of the assets, split by the current rating of the monoline insurer, is shown below.
Rating of monoline insurers – As at 31.12.08
Non-
Investment
AAA/AA A/BBB Grade Total
£m £m £m £m
2005 and earlier – 437 – 437
2006 69 544 – 613
2007 and 2008 – 2,277 425 2,702
CMBS 69 3,258 425 3,752
Note
aMarks are based on gross collateral.