Structured Equity House: Goldman Sachs

IFR Awards 2021
8 min read
Stephen Lacey, Owen Wild, Fiona Lau

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In a year when anything seemed possible until it wasn’t, Goldman Sachs stood out by helping clients fund at historically unprecedented terms early in the year and later taking a more strategic approach. The bank is IFR’s Structured Equity House, Americas Structured Equity House and Asia-Pacific Structured Equity House of the Year.

In structured equity the sky was the limit in early 2021, with seemingly no ceiling to the premiums possible on convertible bonds and the call spreads that often accompany them.

The textbook performance of equity-linked investments when markets tanked in early 2020 combined with dizzying equity valuations led to an influx of investor capital seeking to chase further potential upside, while protecting themselves from possible corrections.

Online travel company Expedia set a record in February that is almost certain to stand the test of time by raising US$900m from the sale of a five-year convertible bond with zero coupon and 72.5% conversion premium, the highest ever premium achieved on a plain-vanilla CB. Peloton had only set a record of 65% a week earlier. Both deals were led by Goldman.

“Expedia really opened a lot of eyes as to what was possible,” said Michael Voris, head of Americas equity-linked at Goldman, which was lead-left on the deal. “Toward the tail end of 2020 investors were making a lot of money from the post-Covid stock market rally and that continued into the first quarter.

“You had a convertible market that had come off a record year in terms of performance and had a lot of capital flowing into the product.”

Banks had begun marketing as a US$825m CB with 57.5%–62.5% premium guidance, yet the Baa3/BBB– rated issuer still saw the bonds rally to 102–102.5.

Together with proceeds from the concurrent sale of US$1bn of 2.95% 10-year straight debt, Expedia used the money to tender for US$1.1bn of 6.25% debt issued at the height of the pandemic in April 2020, shaving some US$40m of annual interest expense on the refinancing.

A week after Expedia, cloud storage provider Dropbox followed, raising US$1.4bn with a two-part CB that priced at zero-percent coupons and 65% and 52.5% conversion premium to its shares at the time, well through aggressive ends of talk, with Goldman as a joint lead.

Airbnb (US$2bn), Enphase Energy (US$1.15bn), Spotify (US$1.5bn) and Twitter (US$1.4bn) were other large cap tech clients that turned to Goldman for CBs in the first quarter, all with zero-percent coupons and 50%-plus premiums to their stock prices at the time.

Chinese online delivery outfit Meituan capitalised on the desire for issuance from growth companies with a US$3bn convertible bond alongside a US$7bn primary follow-on in April that is the largest ever CB from the Asia-Pacific. Buy-now-pay-later company Afterpay secured A$1.5bn (US$1.2bn) from a CB with a 45% premium, the highest ever for an Australian issuer, while Russian e-commerce company Ozon secured US$750m of five-year paper just three months after listing on Nasdaq. Again, all were Goldman deals.

Record breaking

The first quarter of 2021 saw a record US$67.6bn of issuance globally, up 168% on the first quarter of 2020, while the first-half total of US$114.4bn meant the market was still on track for a record year. In the event a slump in the second half meant annual issuance of US$183.8bn was down 2% on the previous year.

Goldman ended the year top of the league tables in the US, with 17% market share from 65 deals, EMEA (11.5%, 11 deals) and international issuance in Asia-Pacific (21%, 16 deals).

“One of the things I am most proud of is the number of deals we led,” said Voris. “Typically companies gravitate to their lenders.”

“When the markets become as volatile as they have been over the past two years this is when we perform the best because people come to us for honest judgement and advice. Clearly they don't come to us for balance sheet,” said Celine Assouline, who co-heads an alternative equity team in EMEA with Lyle Schwartz which covers SPAC origination, PIPEs, pre-IPO equity placements and CB financing. “Of the [EMEA] deals that we have executed this year, 70% were for issuers that we don't lend to and 90% of those were as global coordinator.”

While issuance generally slowed in the second half, that didn’t stop Goldman bringing differentiated trades, including Sea’s US$6.9bn combo in September. Investors had abandoned Chinese tech companies due to regulatory concerns, making the Singapore-headquartered and NYSE listed e-commerce company a comparatively attractive Asian alternative. The US$3.9bn raised from the convert made it the largest CB in the US all year.

“In every single one of these trades, we focused on being the lead bank, on structuring, driving, advising, and getting trades across the line,” said Christian Lhert, head of equity-linked origination for Asia-Pacific ex-Japan.

SPACs, a business where Goldman ran US$14.7bn of IPOs in 2021, is a new client base for converts.

US home-focused software provider Porch refinanced a series of acquisitions with a US$385m five-year CB which priced at a 0.125% coupon and a 40% conversion premium in September, its first equity-linked deal since going public in 2019 via a SPAC merger.

Innovation was also on display with NiSource, a natural gas and electric utility in the US, gaining full equity credit on the US$862.5m it raised in April from the sale of a three-year mandatory convertible offering, a first-of-its-kind security. That equity treatment allowed NiSource to say it would not sell common stock through 2024.

NiSource’s mandatory also limited dilution recognition to prices above the conversion price, so-called Treasury stock method accounting.

“Utilities have very defined equity needs they have to achieve each year. As a result, they have been frequent issuers of mandatories,” said Voris. “In this case, NiSource was attracted to the Treasury stock method and that the extra equity cushion provided them strategic flexibility.”

Going green

The bank harnessed the upbeat sentiment surrounding ESG themes and acted as the sole sustainability structuring adviser for video-streaming site Bilibili’s US$1.6bn green CB. The largest ever green CB from a Chinese issuer attracted strong demand from European long-only investors that have ESG mandates.

The November deal also reopened the Chinese ADR equity-linked market seven months after the Li Auto CB, against the backdrop of a fast-evolving regulatory landscape for Chinese tech companies.

Goldman ranking first in an ECM product is expected. Yet in the EMEA region equity-linked has always been one of a range of options for issuers with derivatives and straight equity given equal weighting and less interest in the CB league table, which can be dominated by lenders.

In fact, the bank hasn’t topped the table in over 25 years and wasn’t even in the top 10 in 2015. In the past three years it has gone from eighth to fourth to first.

Those gains owe a debt to the work of the cross-markets group that covers smaller companies, such as Meyer Burger, and also the effort to carve a niche in green converts where the bank has led all bar one to date in EMEA, though sadly that area has not experienced anything like the growth seen in straight debt versions.

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