On Monday, Barclays announced that it has decided not to participate in the government's Asset Protection Scheme. We are of a mixed mind about this announcement and are keeping the company unrated.
Our primary reaction is that Barclays' decision is a very risky one--the bank is essentially taking a gamble on its ability to withstand a downturn of unknowable depth and duration. If it wins this gamble, it will have preserved a significant amount of shareholder value and will probably emerge in a strong competitive position. If it loses, however, it may find itself with very few avenues for raising additional capital to cushion higher-than-expected losses. On the other hand, we take comfort in knowing that Barclays passed the Financial Services Authority's extensive stress test, and the bank's success supports its position that the reason that its markdowns have not been as aggressive as those of some peers is that its assets are of higher quality. The stress test considered scenarios in which the current recession lasts for two years and home prices fall as much as 50%.
Separately, Barclays is continuing to shop its crown jewel, the iShares business. The bank on Tuesday confirmed media reports that it is in exclusive talks with CVC Partners--it did not provide any detail on price but a figure in the region of £3 billion has been bandied around the market. So far, bidders have failed to reach Barclays' target valuation of £4.5 billion. We hope Barclays is able to sell the business for a fair price, as the bank could certainly use the additional capital--especially in light of its decision not to participate in the Asset Protection Scheme. At the same time, we think that very few businesses are being sold in this environment at anything but a significant discount, and we're not optimistic that iShares will fetch what it might have a year or two ago. Barclays has said that a deal could be reached within a week.
