Barclays 2008 Annual Report Download - page 41

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Business review
Barclays PLC Annual Report 2008 39
Financial review
Additional financial disclosure
Off-balance sheet arrangements
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 33.
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 33.
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 on-
going 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 (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 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 2009 has been assessed and is included in the determination of
£1,763m impairment charges and other credit provisions in relation to
ABS CDO Super Senior and other credit market exposures for the year
ended 31st December 2008.
The Group’s exposure to ABS CDO Super Senior positions before
hedging was £3,104m as at 31st December 2008. 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. The undrawn mezzanine facilities that
were in place as at 31st December 2007 relate to CDOs that have been
consolidated during the period.
Collateral
The collateral underlying unconsolidated CDOs comprised 78% residential
mortgage backed securities, 3% non-residential asset backed securities
and 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 5.1
years. The combined Net Asset Value (NAV) for all of the CDOs was £2.2bn
below the nominal amount, equivalent to an aggregate 41.3% 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. The senior portion
covered by liquidity facilities is on average 85% of the capital structure.
The initial WAL of the notes in issue averaged 6.7 years. The full
contractual maturity is 38 years.
Interests in third party CDOs
The Group has purchased securities in and entered into derivative
instruments with third party CDOs. These interests are held as trading
assets or liabilities on the Group’s balance sheet and measured at fair
value. The Group has not provided liquidity facilities or similar agreements
to third party CDOs.