Goldman Sachs
The US firm has demonstrated that a smart approach can be profitable at the short end of the curve
 |
| John Willian |
To be named as the best global short-term debt house requires critical mass in the US, Europe and Asia. Goldman Sachs demonstrated its relevance to a wide range of clients via value-added transactions during a 12-month period when borrowers’ requirements for strategic short-end financing were increasing.
With a respectable $225 billion in outstandings, Goldman Sachs’ short-term debt business is on an upward curve, both in terms of its market scope and innovation. More than ever before, the short end is a key tool in Goldman’s effort to provide a comprehensive funding mix for its clients.
“The marquee transaction for us in the past year has been the debt IPO for Berkshire Hathaway… We have done two deals for them this year. Both of these were on the back of large acquisitions,” says John Willian, partner and head of global money markets at Goldman Sachs. The trickier of these sole-led deals took place in the midst of negative AIG/General Re headlines, but the $800 million three-year FRN printed without requiring a premium, at Libor plus six basis points.
The business environment has played well to Goldman’s franchise. Not only has its iron grip on M&A provided a rich vein of strategic financings but its creative outlook on debt has proven a blessing for the Landesbanken for instance. BayernLB and WestLB have both printed dollar short-dated deals called extendable notes (X-Notes). These enable the borrower to access aggressive short-end funds but, as the name suggests, allow for the maturity to be extended for a coupon step-up (in this case until 2015). The advantage is that these investors are willing to accept a lower yield than traditional buyers of plain 10-year bank bonds.
“We look at the extendable note as a strategic funding tool for various sectors, for example Landesbanks because of grandfathering. And for large commercial banks in general it is a liquidity management tool,” says John Delaney, executive director, European financing group, Goldman Sachs. “Royal Bank of Scotland did a $4 billion X-note with us – the largest yankee deal to date and the second largest deal ever after GECC’s two outings for $6 billion each.”
Why did RBS choose an extendable note? Delaney says: “It’s a cutting-edge product for them which gives them very good funding costs. On a blended basis it looks very attractive versus five-year funding.”
A borrower such as RBS could save between 4.5bp and 8bp. For others it can be 10bp to 15bp, depending on credit quality. It is both a corporate and bank product.
Andrew Ellis, executive director, money market origination, points to burgeoning volumes in this sector. “If you combine 2004 and 2005 to date, there has been just shy of $77 billion of issuance, with $44 billion issuance last year versus $23 billion in 2003. The level of non-US issuers tapping into the X-note market in the US has grown. It’s around 30%, which is critical in terms of how the product has grown in acceptance,” he says.
Goldman’s list of clients – which includes United Technologies Corp, Monsanto, Procter & Gamble, SBC Communications, Verizon Wireless Corp, ConocoPhillips, Reed Elsevier and FedEx – where CP has proved pivotal for acquisition financing is truly impressive. “During 2004 the M&A franchise was kicking in significantly – there were 17 transactions where CP was instrumental, worth $32.6 billion – it was $10.4 billion the year before,” says Ellis.
The rise of ABCP on both sides of the Atlantic is a well-documented theme. But one of the most innovative areas is the provision of CP tranches on CDOs, which is a further means for avoiding the need for a back-up liquidity on the structure. The new innovation is the involvement of a put counterparty in the structure to participate, to step in to provide liquidity, effectively, where the subordinated section of the CDO (Classes B, C and D) are in default. They would step in to purchase Class A2, thereby keeping the structure afloat at that time.
“We captured a lot of market share when JPMorgan left the business from people looking for a more stable set of hands and from looking for somebody who is globally committed to the business. That was a question we fielded from a lot of major issuers and I think drove a lot of their decision. We do make money from this business!” says Willian.
Perhaps the most satisfying mandate of all came when JPMorgan chose Goldman as the first dealer on its programme.
