US Bond House: Goldman Sachs

IFR Awards 2018
5 min read
Natalie Harrison


US investment-grade bond volumes dropped for the first time in eight years in 2018 after tax reform reduced the need for some companies to borrow. For its strategy of focusing on its M&A strengths to win high-grade market share and for tackling some tough high-yield bond stories, Goldman Sachs is IFR’s US Bond House of the Year.

US Bond House 2018

Tax reforms announced in late 2017 meant some of the biggest bond issuers in the technology and healthcare sectors had less need to borrow to finance capex and share buybacks, as they could repatriate overseas cash instead.

So Goldman Sachs decided it would leverage its leading position as an M&A adviser to win bond mandates for acquisition financings, which picked up in 2018 from prior year levels. But those deals were not the easiest to sell in 2018 as the corporate bond market came under strain amid weaker foreign demand, negative returns, geopolitical worries and rising rates.

“We knew going into this year that our opportunity set would be in M&A, and we had a game-plan to attack as much of that business as we could,” said Jonny Fine, head of Americas investment-grade syndicate at Goldman.

The bank ranked number one in the US dollar bridge loans league table, and was a bookrunner on five of the 10 largest M&A bond financings this year, including the US$15bn issue that financed drugmaker Bayer’s acquisition of Monsanto.

It was also one of four active bookrunners on the US$40bn bond issue that financed the acquisition of health insurer Aetna by pharmacy chain CVS – the largest bond deal of the year and one that was seen as a litmus test of risk appetite at the time.

Getting it right was absolutely crucial as there were billions more M&A bond deals in the pipeline.

Big M&A deals may have been popular in the past, but they were less in vogue with the buyside this year. Investors have grown more cautious about excessive leverage, and particularly about the enormous growth in Triple B debt that now accounts for around half of the US$6trn high-grade market.

That made the success of the CVS trade, rated Baa1/BBB+, even more notable. One of the things that helped its appeal was an unusual discount offered on the bonds when they were priced.

That was in response to pushback by investors on traditional special mandatory redemption language to help protect their returns from rising rates, and worries about losses on bonds in the event that regulators blocked M&A deals.

To help address some of those sensitivities, CVS broke with the tradition of pricing M&A bonds close to par.

“It was felt by the buyside that this [discount] was a move in the right direction. It was welcomed and it led to very strong bookbuilding across all the tenors,” said Fine.

CVS ended up breaking records with the biggest order book ever seen in the US dollar high-grade market.

Not every M&A deal that followed was as warmly received. But Goldman didn’t put all its eggs in one basket as it was also a go-to adviser on many of the year’s bank capital trades – another significant driver of volumes in 2018.

Among the highest-profile bank deals that Goldman helped lead was the first senior bail-in deal from Royal Bank of Canada; a 30-year issue from Intesa, which was the first Yankee public benchmark in this tenor from a Southern European bank; and a debut US dollar holdco from Ireland’s AIB Group, which was also its first dollar deal since the financial crisis.

A US$5.5bn debut issue from Macau casino operator Sands China was another one of its standout trades, which after some well thought-out marketing ended up being a blowout.

“It’s one of the most fascinating deals I’ve ever worked on. It was hard to get investors to understand the story because there’s no gaming industry in US IG,” said Fine.

But telling the story is something Goldman does well, including in high-yield – where volumes also fell significantly on year earlier levels and where the bank has a top three spot in Refinitiv league tables.

It was lead-left on a US$1.825bn-equivalent bond financing KKR’s buyout of BMC Software – the first of few sizeable LBO financings that priced in late summer onwards.

It was a business investors already knew under the ownership of Bain Capital and Golden Gate, and whose bonds at one point had fallen to the low 60s on concerns about mainframe computers and the competition they faced with the cloud.

But Goldman managed to reposition the credit and priced the US$1.475bn dollar tranche at par to yield 9.75%.

“It was a non-perfect experience owning the outstanding paper, but we believed in the story and we re-educated the market,” said Kevin Sterling, Goldman’s head of US leveraged finance capital markets.

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US Bond House: Goldman Sachs