High-Yield Bond House: Goldman Sachs

IFR Review of the Year 2014
8 min read
Natalie Harrison, Robert Smith

Altice and Numericable’s record-breaking deals cemented Goldman Sachs’ global high-yield franchise, but it was a focus on small European companies that got them to the top. For seeing which way the wind was blowing earlier than most, Goldman Sachs is IFR’s High-Yield Bond House of the Year.

When Altice and Numericable priced a US$16.7bn high-yield bond package in April 2014, it vindicated Goldman Sachs’ decision half a decade ago to pour resources into the then niche European high-yield market.

Europe had always seemed trivial in high-yield compared with the enormous US market. Whereas Michael Milken made “junk bonds” sexy in the US in the 1980s, it remained a taboo phrase for European corporate treasurers for decades.

And yet here were two French companies raising a record-breaking amount of high-yield bonds to buy another French company.

“There are many great things about the deal, but perhaps the greatest thing is that even a few years ago no one would have thought that the largest high-yield bond deal of all time would come out of Europe,” said Denis Coleman, who moved over from Goldman’s US leveraged finance team in 2009 to head the EMEA credit finance team.

Goldman was a global co-ordinator on the Numericable bonds and loans, but was entrusted with the lead-left role on the most difficult piece of the puzzle: the US$5.8bn-equivalent Altice bonds. When the deal was announced, many said it would have to come north of 8%. And yet the bonds were eventually priced at 7.75% on the US dollar tranche and just 7.25% on the euro piece.

But while Altice and Numericable was a gargantuan deal, Goldman’s coveted lead-left role was born out of the bank’s focus on small companies.

Altice’s founder Patrick Drahi built the business from scratch by cherry-picking assets across the globe and then consolidating them to achieve synergies.

Goldman Sachs was there from day one.

Head of EMEA leveraged finance origination Littleton Glover recalls that a request to sign a €10m relationship loan to a Drahi Portuguese business in 2012 raised a few eyebrows internally.

“The initial response was: ‘We’re Goldman, we don’t do €10m loans.’ But I was insistent: ‘This is a client that needs a €10m loan now, but will need billions of dollars of capital in a few years.’”

The loan was signed and Glover’s foresight paid off.

While the Altice and Numericable deals were stereotypical high-yield issues – financing a big cable M&A trade – Goldman has arguably done more than any other to broaden the scope of European high-yield. Its deals in 2014 included a French jeweller, a Belgian burger restaurant and a Swiss vending machine operator.

Bonds from smaller niche firms are more susceptible to idiosyncratic risks, as seen in dramatic fashion in September when Phones 4U went into administration almost a year to the day after Goldman sold a deeply subordinated payment-in-kind bond.

But Goldman has brought these deals to respond to investors crying out for the opportunity to diversify their portfolios away from large industrial firms. And for companies that have no prior experience of high-yield, the Goldman approach makes all the difference.

“I was very impressed by Goldman Sachs,” said the CEO of one borrower the bank brought to the high-yield market this year. “As a small company you’d expect to be low down on the priority list of a large US investment bank, and yet we were never made to feel like a small customer.”

Goldman also put its money where its mouth is, underwriting some of the boldest M&A trades in Europe.

Another notable trade was the Goldman-led €1.45bn-equivalent bond package backing the buyout of Norwegian debt purchaser Lindorff. Running the deal in the dying days before the August break was a brave call, but a nasty dose of volatility made the syndication even more nerveracking.

“For the first time all year, the market was falling away from us as we were running the deal,” said Mike Marsh, head of EMEA leverage finance capital markets.

Goldman helped establish the debt purchasing sector in the high-yield market with its deal for Arrow Global last year, but the market had only ever bought senior secured deals from UK firms.

A nimble approach allowed Goldman to sell Lindorff in a challenging market, adding a Swedish kroner tranche to the unsecured part of the deal at the last minute to get the transaction over the line.

True grit

While Goldman cemented its position in Europe – one of a just a handful of US banks to have any real market share in the region – it was also a force to be reckoned with on its own turf.

As a dominant player in M&A in the US and in a year when almost 30% of US high-yield volumes were M&A related, Goldman increased its market share at a time when banks with much larger balance sheets such as Bank of America Merrill Lynch and JP Morgan lost ground.

Goldman also attracted talent, hiring AJ Murphy from BofA Merrill as its global head of leveraged finance origination.

“We’re in the boardroom providing advice on everything from M&A, to equity, to leveraged finance,” said Craig Packer, head of US leveraged finance. “We’re not the biggest revolver lender on the Street, but leveraged finance is an important pillar of the firm.”

Goldman was the bank of choice for high-quality corporate issuers such as Charter Communications and Steel Dynamics on M&A deals.

Sponsors also turned to Goldman to lead financings for leveraged buyouts. For example, the bank was left lead on three bond deals for private equity firm Carlyle – Signode, Ortho Clinical Diagnostics and Acosta.

But where Goldman’s leveraged finance team really stood out was their ability to roll up the sleeves and knuckle down to get the best possible result for clients even when markets were weak. The bank pulled a couple of deals, but that was far less than some of its rivals.

“In a good market everyone looks good, but in a tough market a good franchise can really add value,” said Kevin Sterling, head of leveraged finance syndicate.

Its leadership in the financing of Charter Communications’ purchase of Time Warner Cable assets from Comcast was a good example.

Goldman brought Charter to the loan market in July to finance the deal, only to see volatility sweep the market straight after launch.

Geopolitical fears triggered a rare correction in the S&P, high-yield mutual funds saw their biggest outflows in a year and multiple loans were either pulled or priced wide.

While Charter could have priced a US$7.4bn loan, Goldman went for a smaller US$3.5bn issue. The decision was the right one as Charter returned with a blowout US$3.5bn bond in October, which was more than doubled in size on a book north of US$9bn and came cheaper than the loans.

The decision to bring an US$800m unsecured bond issue for Acosta to market in August also proved a wise one. Despite Triple C bonds repricing dramatically, Goldman printed the eight-year bonds at the tight-end of talk at just 7.75%

Goldman also picked the right spots to bring some of the most complex deals. Among them was a recapitalisation for financial advisory firm Altegrity, which included a US$275m loan and a US$825m first-lien secured bond.

It wasn’t the easiest of transactions, with pushback from investors leading to sweetened terms – but it gave the company some breathing space, if only for a few months.

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High-Yield Bond House 2014
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