Barclays threw a $1.6 billion (£790 million) lifeline yesterday to one of the controversial SIV-lite funds that it created after agreeing a restructuring of the $1.8 billion fund with investors.

Barclays Capital, the bank’s investment banking unit, and Cairn Capital, the London-based manager of the fund, insisted that the loan was not a “rescue” or “bailout”. “Our investors are paying a commercial rate for that loan,” a Cairn spokesman said.

BarCap is in restructuring talks with at least two other SIV-lites - the £2 billion Mainsail II and $1.9 billion Golden Key - but sources said that there was no guarantee that the discussions would be successful.

The agreement with Cairn comes after a difficult week for Barclays, in which its share price fell to 589p, further damaging its bid for ABN Amro. The bank was forced to obtain a second emergency loan from the Bank of England after a malfunction at the market’s settlement system.

Bob Diamond, chief executive of BarCap and one of the City’s most powerful and respected bankers, has come in for unprecedented criticism for the bank’s involvement in SIV-lites, a highly leveraged structured investment vehicle.

Edward Cahill, the BarCap banker who pioneered SIV-lites, has hired the lawyers Mischon de Reya to counter speculation about his departure from the bank. It was announced last week that Mr Cahill would leave.

Under yesterday’s deal, Barclays will lend the Cairn fund between $1.4 billion and $1.6 billion to pay off its commercial paper as it matures over the coming five years. To cover the cost of the loan, Cairn investors agreed to accept a cut in the coupon they receive from two types of subordinated loan notes held by the fund.

An earlier attempt to restructure Cairn’s fund, Cairn High Grade Funding I, had failed because it could not attract a counterparty on which to lay off some of BarCap’s risk. Sources said that BarCap had now obtained a credit default swap to protect its cash, should Cairn default on the loan.

BarCap agreed to provide a “liquidity backstop” to the SIV-lites it created, which allows the funds to ask the bank to cover up to 25 per cent of the value of the commercial paper the fund issues if the market turns sour.

The backstop is invalidated if the assets in the fund lose more than 10 per cent of their value. Sources at BarCap have said that the bank’s potential losses from struggling SIV-lites are well under £100 million.

SIV-lites are packages of asset-backed securities that are used as collateral to raise money in the commercial paper market. They are often leveraged by between 40 and 70 times.

Times Recommends

• US stocks fall below 9,000 mark
• House price fall smallest in seven months
• Wary investors opt to keep cash in safes