It is appropriate that Protium is the name both of a loans vehicle spun off by Barclays and a medicine for a nasty digestive complaint. The creation of Protium in 2009 was interpreted by commentators as a means of shielding Barclays’ balance sheet and bottom line from the acid reflux represented by potential writedowns in the value of $12.3bn in toxic assets. It has done that effectively. But its dismantlement is likely to leave critics of Barclays feeling distinctly queasy instead.
On Wednesday the bank announced it was taking back full ownership of Protium, which is managed by a bunch of former employees. The apparent reason is that US subprime borrowers have proved less feckless than expected. They are not, it transpires, banjo-twanging extras from trailer trash sitcom My Name is Earl. They are hard-working, God-fearing folks who are paying off their loans at a good lick. Protium has captured repayments of £3.3bn so far, Barclays says. Diamond Bob’s Credit Emporium hopes to dispose of the whole portfolio by 2013, when tougher Basel III capital ratios will have begun raising the cost of owning the loans.
A sceptic might interject that telescoping Protium’s anticipated rundown from 10 to four years embodies an extraordinary uptick in the personal integrity of subprime borrowers, even allowing for a recovery in the US economy to pre-crisis output levels.
He or she might also querulously note that the executives who own C12, Protium’s investment manager, have done very nicely. They will get $83m for their interest in Protium, a vehicle of questionable independence given that it was funded by a $12.6bn loan from their former employer. Good going for a year and a half’s work. Barclays will moreover invest $750m in Helix, a separate fund set up by C12.
The Protium volte-face only deepens the conviction that banks are selectively opaque businesses run for the benefit of senior bankers as much as that of shareholders. Suggestions on Wednesday that Protium was primarily a vehicle for retaining the valuable services of the C12 partners are unconvincing. Even more than before, Protium looks like a device for varying the accounting visibility of loans in line with their fluctuating creditworthiness. The generous treatment of ex-employees, meanwhile, reinforces the popular belief that bankers emerge wealthier from most deals, regardless of how they turn out. Think about it too long and one could wind up positively dyspeptic.
Sum of three parts
It is unsurprising that Glencore pays little tax. Private Swiss businesses are not noted for their two-fisted contribution to public coffers. But the news contributes to the City’s growing understanding of Glencore as it heads towards flotation next month. And, as ever with a float, investors are groping towards a single judgment: whether the shares are cheap or expensive at the offer price.
That judgment will be made easier by the tripartite structure that reflects Glencore’s business model. Part One is a portfolio of stakes in quoted resources companies. These range from a 34 per cent stake in Xstrata – the FTSE 100 miner that Glencore aspires to own outright – through to a 97 per cent shareholding in Los Quenuales, a Peruvian zinc business. This portfolio was worth about $33bn at Wednesday’s close.
Part Two is a portfolio of unquoted investments with the same function as the quoted stakes. They provide income, access to the commodities that Glencore ships around the world and the market knowledge that allows traders to turn a profit. But valuing Part Two is trickier. The typical approach is to work out a present value based on forecast earnings for each asset. Analysts will have more than 1,000 pages of prospectus to digest on this topic, poor devils. Current estimates range from $15bn to $22bn.
Valuing Part Three – Glencore’s trading activities – also involves earnings ratios. The forward multiple of 16 times for Noble Group, a comparable Singaporean business, is sometimes cited as a benchmark. But that may be toppy. At a more modest 12 times earnings, Glencore’s trading arm would be worth some $25bn, contributing to a grand total of more than $70bn for the whole group before net debt of $13bn. You may then knock off up to 10 per cent if you deem Glencore a discountable quasi-investment company, using the resulting figure to measure the business’s own estimate of self-worth, when that is published.
All jolly fiddly. But in one respect, the Glencore float should be a no-brainer. If you believe world demand for metals and energy will remain strong, buy. Otherwise, avoid.
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