Goldman's bond payday spells trouble for rivals

IFR 1891 9 July to 15 July 2011
6 min read
Jonathan Rogers

Jonathan Rogers, Chief Analyst, IFR

Jonathan Rogers, Chief Analyst, IFR

Goldman Sachs seems to have woken up to the attractions of doing business in Asia. While it wields the axe in the US, having recently slashed 230 jobs in its New York office, with the aim of saving around US$1bn in costs over the next year, the firm is beefing up its Singapore operations.

Various media reports put the figure of the number of senior staff Goldman is looking to relocate to or hire in Singapore at 1,000. That seems rather a large number of investment bankers to add to the payroll, even bearing in mind Singapore’s growing significance as a regional financial hub. Whatever the number, the move complements Goldman’s initiative to add to its operations in India and Brazil while at the same time downsizing in the US.

Goldman does nothing by accident, so what is behind the gnomically astute US firm’s move? It might be a bet that the long-term decline of the dollar versus Asian currencies will provide a boost for Goldman’s consolidated profits. It might also be a response to the straightjacket about to be imposed on the US investment banking industry by Dodd-Frank and the eponymous Volcker Rule.

While still being thrashed out by US regulators, the impending regulations will prohibit proprietary trading and clip the wings of houses that have traditionally relied on their trading books for the bulk of their profits.

As Goldman looks to replace those profits it could certainly do far worse than the trade it privately completed just over a week ago for an investment company owned by the state of Sarawak in Malaysia. The sole books deal for Equisar must have turned rival Asia-based DCM originators and structurers green with envy.

Goldman’s fees on the US$800m three-tranche 15-year are rumoured to be anywhere from 1.25% to 1.75%. That’s a US$10m–$14m payday from one deal, the kind of wedge it might take a rival bond house more than two dozen standard G3 syndicated bonds to bring in – and there’s also the possibility of a juicy follow-on commission to be earned from Equisar.

According to the offering circular, proceeds from the offer may be invested in “eligible investments” comprising infrastructure projects in Sarawak or “an investment in any US dollar-denominated note, fund or other instrument arranged by Goldman Sachs International or its affiliate under which the issuer will receive periodic payment(s)”.

There is also a binding clause in the deal’s structure that stipulates that holders of the deal’s first tranche, or the Class A notes (there are Class A, B and C notes of US$302m, US$348m and US$150m respectively), have rights over those of the Class B holders.

It runs: “The Class A noteholders have certain rights to give approvals and directions … which would then bind all the Class B noteholders … Class B noteholders may be adversely affected by the approvals and directions given by the Class A noteholders.”

Interesting indeed. It might be that Goldman Sachs holds the more than 50% of the Class A notes required to bind Class B noteholders to its decisions. Furthermore, this might involve investing in a range of products offered by the US house from which it will further profit.

Goldman declined to comment, so it’s possible that the entire US$800m has been placed with third-party investors; that all the proceeds will fund infrastructure in the state of Sarawak, and that Goldman’s profits from the state will stop at the fees it earned for structuring and placing the deal. Still, the binding clause is not there by accident.

While I find it difficult to erase from my mind the image of provincial funding officers sitting next to a rubber plantation in Borneo and being dazzled by slick American investment bankers pitching abstruse financial wares, it might be disingenuous to imagine that Goldman blinded them with science on the deal.

Still, I’m not sure they were best served by it. One of the big mysteries of the deal is its yield and why it emerged in private form rather than as a publicly syndicated G3 deal, possibly in 144a format.

The deal carries an A– rating from Standard & Poor’s and yet pays a 6.25% coupon across all three tranches. That’s around 160bp more than Malaysia paid for 10-year US dollar funds in its sukuk offering a few weeks back, and 180bp more than where those bonds were trading last week.

With the swap curve worth 50bp between 10 and 15 years it’s difficult to justify the 1%-odd premium Equisar appears to have paid for its 15-year funds given that its deal has the same credit rating as Malaysia’s.

Although a 15-year tenor is doubtless challenging, it’s not impossible to pull off at the right price. What’s more, a 10-year 144a trade for Equisar would seem to be easily printable in the current environment, where Single A credits from Asia are drawing solid demand.

Goldman’s Asia DCM franchise has been little more than a bit-part player in Asia’s G3 public bond markets, living in the shadow of the firm’s lucrative ECM business. More crafty deals like Equisar, however, will stand the DCM team in good stead when it comes to fighting for further investment.

As Goldman downsizes in the States and upsizes in Asia its rivals have every reason to feel nervous.