Aug. 31 (Bloomberg) -- Barclays Plc, the U.K.'s third- biggest bank, will help rescue a $1.6 billion debt fund run by London-based asset manager Cairn Capital after it was unable to raise money in the credit markets.

Barclays Capital, the securities unit, will provide a loan to refinance the Cairn fund's asset-backed commercial paper as it matures, the London-based bank said today. The fund owns U.S. securities mostly backed by mortgages and without the loan would have had to sell some of its investments.

``What we've got is financing for the portfolio of assets through to final maturity, which is important because it means we don't have to sell assets in the market,'' said David Littlewood, a director at Cairn in London. ``The assets in the portfolio are of good quality.''

Companies that depend on commercial paper, debt due in 270 days or less, are facing funding shortages as investors refuse to buy debt secured by assets including U.S. subprime mortgages. HBOS Plc, the U.K.'s largest mortgage lender, was forced on Aug. 21 to commit to refinancing about $35 billion of asset-backed commercial paper sold by its Grampian Funding LLC unit after yields on the short-term debt soared to the highest since 2001.

Highest Ratings

The fund, Cairn High Grade Funding I, is a so-called structured investment vehicle that raised money in the commercial-paper market and invested the proceeds in asset-backed debt. All the holdings in the fund have AAA ratings, the highest possible, Littlewood said.

``If the assets had been of weaker quality it would have been more difficult to get this done,'' he said.

Barclays Capital helped set up the Cairn fund and was ``instrumental'' in creating other similar investments, ``and as such has potential exposure to some of these entities,'' according to Standard & Poor's. The securities unit, Europe's No. 2 arranger of asset-backed bond sales, accounted for more than half the profit at Barclays in the first half.

S&P yesterday affirmed the AA rating on Barclays's debt and said ties to structured investment vehicles were unlikely to result in downgrades. Barclays said it hedged the risk from the financing announced today.

Barclays shares rose 16 pence, or 2.7 percent, to 613.5 pence in London, leaving declines this year at 16 percent.

Barclays `Flush'

Separately, Barclays borrowed as much as 1.6 billion pounds ($3.2 billion) from the Bank of England after a failure in the system that processes trades, according to a person with knowledge of the transaction. The Bank of England said yesterday it extended the cash at its highest interest rate of 6.75 percent, without identifying the recipients.

Barclays spokesman Alistair Smith said in a statement yesterday the bank is ``flush with liquidity.''

Barclays, which is vying for ABN Amro Holding NV in the world's biggest banking takeover, has seen the value of its mostly stock offer shrink to 61.4 billion euros ($83.7 billion) as its share price fell in the past two months. That compares to the 72 billion-euro offer of a group led by Royal Bank of Scotland Group Plc.

The investors in the Cairn fund agreed to bear the costs of the restructuring, Barclays said. Standard & Poor's today said it considered the fund to have defaulted on $162 million of bonds because it won't pay the holders as much as originally agreed. Investors will receive $126 million of new notes, rated AAA and AA by S&P, which won't pay interest.

Funding Commitments

Barclays had committed to provide $556 million of emergency funding to Mainsail II, a fund set up by London hedge-fund manager Solent Capital Partners LLP, and $344 million to Golden Key Ltd., a unit of Geneva-based asset manager Avendis Group.

Standard & Poor's cut its ratings on the two funds to junk from AAA last week after investors refused to provide them with short-term funding.

Barclays Capital spokesman Jon Laycock declined to comment on whether the bank had provided money to Mainsail II or Golden Key. Barclays said on Aug. 28 it had provided no financing to a similar fund run by German lender Landesbank Sachsen Girozentrale, which received emergency funding on Aug. 17.

Barclays Capital's head of European collateralized debt obligations, Ed Cahill, resigned last week after three years at the bank, according to two people with knowledge of the matter.

Paul Campbell, who had previously worked at a unit of American International Group Inc. and at JPMorgan Chase & Co., set up Cairn Capital in 2004 with backing from Royal Bank of Scotland and Star Capital Partners. Cairn has $8.9 billion invested in debt funds and runs a $200-million hedge fund, according to its Web site.

To contact the reporter on this story: Sebastian Boyd in London at sboyd9@bloomberg.net

Last Updated: August 31, 2007 14:02 EDT