Crunched credit markets used to be likened to a cocktail party at which one glass out of hundreds on offer was laced with poison. Naturally nobody wanted to drink any of them.
Yet some reactions to Barclays’ sale of $12.3bn (£7.5bn) of toxic credit assets to a newly formed company suggest the party is under way again. By selling the assets, some critics say, Barclays is giving up potentially large increases in their value as the world economy recovers.
Rather than worrying about missing the upside, investors should be pleased Barclays has cauterised the risk that a downgrade of monoline insurers – which guaranteed $8.2bn of the assets – would force the bank to take yet another write-off through its profit and loss account.
Barclays has guaranteed itself interest income by lending Protium, purchaser of the toxic assets, the money to buy them. Naturally investors would have liked the option to take some upside if the deal benefits Protium. But it defies belief that what was poison six months ago, when Barclays was straining to meet the authorities’ stress tests, is now a desirable magic potion. In any case, how would anybody know, this early in a fragile recovery?
The point is that Barclays preferred to take the safer course. The fact that it could do so at all – compare Lloyds Banking Group, straitjacketed into the government’s asset protection scheme – should be reason enough for shareholders to be satisfied.
There is no cause for wild celebration, however. There is still a risk that the loan to Protium may have to be written down if the underlying assets themselves sour further. The deal places the assets one step further away from the intense individual and regulatory scrutiny they would receive if they remained on Barclays’ balance sheet – though clearly it is still in the bank’s interest to keep a very close eye on its new customer. Finally, these assets came from Barclays Capital, which has been expanding rapidly, supercharged by its bargain-basement purchase of Lehman’s US operations a year ago. The toxic exposure was cramping its style.
Barclays may depict itself as a conservative corporate citizen sipping mineral water in the corner, but another way of viewing this deal is that it gives BarCap more freedom to enjoy the party.
Bridge across the Atlantic
That’s more like it. Just when it seems UK plc is being taken over by foreigners – Americans gobbling up our chocolate! Chinese making a partial grab for our raincoats! – along comes a bit of reverse traffic. Balfour Beatty is absolutely right for the job. The construction group has, in its century-long history, built dams, bridges and airports across the empire, and more besides. Now it is paying $626m for a US-based professional services firm focused on infrastructure.
It gets sweeter. Parsons Brinckerhoff has global reach and operating margins that dwarf those at Balfour Beatty, but is a cosy concern wholly owned by employees. Workers are giving up stock options designed to feather their retirement nests in return for cash today – and a foreign paymaster.
Their jobs, at any rate, should be safe. This is exactly the kind of business Balfour Beatty needs. The deal gives the group, which currently derives 55-60 per cent of revenue from the UK (half of which is from the public sector), more exposure to the US. It also gives it a bigger bite of the white-collar business of managing projects as opposed to the dirtier, less lucrative roll-up-your-sleeves and build stuff. The risk is that the order book shrinks, but US stimulus spending – not to mention the ropey state of much of America’s transportation – creates decent odds. Parsons also gives Balfour Beatty a bigger slice of professional services, which now accounts for just 5 per cent of business but yields operating margins roughly double those available on the grubbier work.
Sure, US revenue will rise from 30 per cent to only 33-34 per cent, and the acquisition is not expected to make a significant return over the cost of capital until after next year. But it makes sense. Let’s just hope there are no pesky patriots in the US preparing to mount a “hands off our professional services” campaign.