Barclays Is Said to Consider Return to Riskier Debt Trading
Risk-On Barclays Is Said to Mull Distressed Debt and CDO Drive
(Bloomberg) -- Barclays Plc is considering a push into riskier debt trading and a return to dealing in complex credit products in the U.S., according to a person familiar with the strategy.
Adeel Khan -- the trader who has driven rapid growth in credit trading over the past two years -- may hire more staff and allocate capital in the British bank’s small distressed business, which has historically lagged U.S. rivals, said the person, who asked not to be identified as the plans are in the early stages. Executives also want to expand in U.S. structured credit, especially collateralized debt obligations, or CDOs, building on its recent success with the instruments in Europe, the person said.
Chief Executive Officer Jes Staley is encouraging the investment bank to take more risks and recapture market share after years of retrenchment. To give the division more capital to work with, he’s sold the bank’s African and European consumer networks, slashed shareholder payouts and cut loose tens of thousands of low-returning corporate clients to prioritize the world’s elite fund managers.
“The firm now has room to use its balance sheet more aggressively to improve returns,” UBS Group AG analyst Jason Napier said in an Oct. 19 report. Disappointing revenue in the second quarter “naturally focuses attention on investment bank returns and the extent to which gross cost saves will be invested away,” but such concerns are “too pessimistic,” he said.
Barclays is also considering expanding into more exotic products that are harder to value and more lucrative to trade, including CDOs in the U.S., the person said. These instruments package debts into securities of varying risk and return, and have attracted investors hungry for yield in an era of record-low interest rates.
James White, a spokesman for Barclays in London, declined to comment.
The stock has fallen about 12 percent this year, the biggest decline among the region’s major lenders in the Bloomberg Europe 500 Banks and Financial Services Index. Barclays cut its dividend in half last year to conserve capital.
Executives think it’s a good time to expand the distressed team -- which buys and sells the discounted debts of companies struggling to repay creditors -- because they expect a deteriorating credit cycle, the person said. As global rates start to rise from rock-bottom levels and lending terms tighten, interest payments climb and it becomes harder to refinance maturing debt.
Big Gains
The bank last year hired Michael Khouri, who now runs its European operations in the area, and in August recruited Paolo Minerva as head of sourcing, a role that involves finding investment opportunities for the team, particularly in Italy.
“We agree with Barclays’ plan to shrink low-yielding corporate-lending assets, but question the decision to recycle capital released by this into the markets business,” Berenberg analyst Peter Richardson said in an Oct. 19 report. “The decision to prioritize the growth of the investment bank over dividends is a strategic misstep.”
The potential gains from trading distressed debt can be stratospheric. Goldman Sachs Group Inc.’s distressed team brought in more than $200 million in revenue in 2016, while a team of Citigroup Inc. derivatives traders generated about $300 million of revenue the same year from U.S. dollar interest-rate swaps, another business Barclays has been hiring for.
Naturally, there’s also a downside. In the first quarter of this year, souring bets made by the same distressed traders drove down Goldman Sachs’s fixed-income revenue, causing a share price dip. Distressed debt has already been on a two-year bull run.
The world’s biggest banks made about $2 billion in revenue from trading the assets last year, according to a person familiar with the industry. A Bank of America Corp. index that tracks dollar-denominated assets has gained 12 percent so far this year after surging 54 percent in 2016.
Revenue Recovery
Khan’s division is among a handful of markets units selected for expansion by Staley and his investment-bank chief, Tim Throsby. Revenue from credit trading jumped 44 percent to 1.2 billion pounds ($1.6 billion) in 2016, and grew another 18 percent in the first six months of this year.
By contrast, revenue at Barclays’ overall markets business, which also deals in equities, rates and currencies, fell in the first half of the year and may have have slid another 12 percent to $2.4 billion for the third quarter amid an industrywide slump, analysts at UBS wrote on Oct. 19. The bank reports earnings for the period on Thursday.
Barclays will “redeploy’’ as much as 23 billion pounds of risk-weighted assets into the targeted businesses -- which in addition to credit trading also include corporate derivatives and currency and rates trading -- 6 billion pounds of which will be completed by the end of the year, Throsby told investors at a Sept. 26 conference.
--With assistance from Dakin Campbell
To contact the reporters on this story: Stephen Morris in London at smorris39@bloomberg.net, Donal Griffin in London at dgriffin10@bloomberg.net.
To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Keith Campbell, Ross Larsen
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