Goldman ruffling feathers in Asian debt

IFR Asia 749 - June 2, 2012
6 min read

Jonathan Rogers, IFR Asia Senior Credit Analyst

Jonathan Rogers, IFR Asia Senior Credit Analyst

Goldman Sachs famously was described by Rolling Stone magazine as “a giant vampire squid wrapped around the face of humanity” and whether or not you decide that’s hyperbolic there can be little doubt that when it comes to Malaysia the US house’s putative tentacles are rather extensively and firmly engaged. In this case, with the Malaysian government, at both central and state level. The end results are the kinds of deal that prompt Asia-focused DCM bankers to turn a bright shade of envious green.

Take the US$1.75bn 10-year private placement for Malaysian investment vehicle 1MDB, which Goldman quietly closed a week last Monday. It was the biggest sole-led bond deal ever printed in ex-Japan Asia, and while it’s not yet clear whether the US house will proffer it up for league table consideration – something which, if it proves eligible, will propel Goldman to number two (from number seven) in the Thomson Reuters tables ­– the fee income on the deal, rumoured to be in the low to mid twenty millions, will have ramped up rival bankers’ chlorophyll levels to the absolute max.

Plenty of them have been cheesed off with the cosyrelationship Goldman enjoys with the Malaysian government. In the case of 1MDB they are galled that the US house’s involvement in the investment company’s metamorphosis from the Terengganu sovereign wealth fund into a plank of Prime Minister Najib Razak’s New Economic Policy (targeting investments in energy, real estate, tourism and agribusiness) has generated what appears to be a fee printing machine.

Certainly there’s little doubt that the M&A advisory work Goldman did on 1MDB’s March purchase of Malaysian tycoon Ananda Krishnan’s Tanjong Power was key in bagging the chunky private placement.

And that sequence is investment banking Nirvana. Do the advisory, fund the bridge and execute the long-tenor debt takeout. The only criticism you might have is that getting more houses involved could have produced a better strategy or more value for money for 1MBD.

But the latter is a moot point. Assuming Najib wins a second term as PM at the general election (which must be held by April 2013) we will, no doubt, be seeing a lot more of 1MDB in the financial markets.

In which case, you might well ask, for this debut foray in the offshore debt markets would not 1MDB have been better served by a public offering?

In the process it would have opened up a universe of investors to whom it can return repeatedly and established a benchmark from which it could compile a full offshore dollar curve over time. A public deal would also have meant more clarity on pricing and fees.

Thanks to a guarantee by Abu Dhabi government-owned IPIC, the bond was rated Aa3 by Moody’s. Looking at the universe of Double A rated oil and energy sector paper in the Asia secondary space will tell you that the appropriate spread for the credit at 10 years is around the Treasuries plus 210bp mark. But 1MDB priced at Treasuries plus 425bp.

Although you can argue that there is an illiquidity premium to be paid to investors for holding private placement paper, I’m not convinced that it should be in the 215bp ballpark.

The IPIC guarantee is unlikely to have come for free – Japan’s JBIC charges around 75bp for a similar credit enhancement – and that begs the question why 1MDB is seeking guarantees rather than going out and obtaining a standalone credit rating.

Yes, the IPIC guarantee enabled 1MDB to tap into the Double A investor base – above Malaysia’s A3 ceiling – but at a cost that surely could have been ameliorated by taking the public offshore route on the back of a Moody’s or S&P.

WHATEVER THE FINER points of debate there’s no doubt that Goldman has got its eyes firmly trained on the Asian debt markets, both public and private. Its regional operation is no longer an equity franchise with debt tacked on as an afterthought, as it was a couple of years ago when (following the departure of Hital Desai to Credit Suisse) the firm lacked a debt syndicate head. The correction of this deficiency, with the appointment of ex-Bank of America Merrill Lynch banker Julian Trott alongside new head of investment grade DCM Dominique Jooris, breathed life into the franchise and saw Goldman cropping up on more and more Asia G3 public deals.

And far be it from me to let daylight in upon the magic (to quote Walter Bagehot on the topic of the British monarchy) but the prime mover behind the 1MDB transaction, Hong Kong-based Andrea Vella seems to be a veritable magician when it comes to the deft, lucrative private placement. He’s also the gentleman responsible for the US$800m private placement Goldman executed last July for the Malaysian state of Sarawak, on which it was rumoured to have picked up 1.25%–1.75% fees.

In conclusion, let me imagine what a seasoned Asia-based DCM banker might have to say about all of the above: nice work if you can get it. When it comes to matching Goldman, rival firms now have to try a little harder.

Jonathan Rogers_ifraweb