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MarketScreener Homepage  >  Equities  >  Nyse  >  The Goldman Sachs Group, Inc.    GS

THE GOLDMAN SACHS GROUP, INC.

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Goldman Turns to Loans, Bond Underwriting

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01/19/2016 | 05:45am EDT
By Justin Baer 

Goldman Sachs Group Inc., beset by a steady decline in a fixed-income trading operation that was once its most-reliable source of profits, is turning for help to a business it once eschewed for help: debt financing.

With its top-ranked mergers-and-acquisitions operation facing more-limited growth prospects and debt trading under pressure from new regulations, Goldman has identified loans and bond underwriting as key sources of additional profit, according to officials at the firm.

As part of the effort, Goldman has been opening its checkbook to corporate clients wider than ever before. Last year, it offered to lend Mylan NV $13.5 billion to help the drugmaker pay for its hostile bid for Perrigo Co., which was ultimately abandoned. In December, Goldman agreed to provide a $10 billion loan to help finance Newell Rubbermaid Inc.'s acquisition of consumer-goods rival Jarden Corp.

The two bridge loans are among the biggest solo commitments the firm has ever made.

Such transactions are part of a push by Goldman to be a bigger player in a corner on Wall Street long dominated by commercial-banking giants such as J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp.

Goldman made its reputation by focusing on businesses like merger advice, initial public offerings and, as the debt markets grew, fixed-income trading. For years, the firm largely left bond underwriting and corporate loans to those competitors with roots in commercial banking.

But new rules on bank capital and risk taking have hemmed in profits in fixed-income trading. The pool of debt-trading revenue available to Wall Street exceeded $130 billion a year before the financial crisis. It fell to $82 billion in 2015, according to Citigroup analysts. That has taken its toll on banks' returns: Goldman's return on equity, which exceeded 30% before the downturn, has sat near 11% over the last several years.

To make matters worse, Goldman is bumping up against highs in the market share it expects it can achieve in M&A and stock sales.

As a result, the firm has been on the hunt for new sources of income. That has meant embracing businesses that would have drawn sneers from Goldman bankers a generation ago, including corporate loans, bond issues--even online banking for retail customers.

Goldman, which converted to a bank holding company at the height of the financial crisis, has directed its investment bankers to tout the firm's debt-financing capabilities to clients, officials said. That became an easier sell with borrowing costs historically low and, more recently, a boom in corporate mergers--many fueled by big helpings of cash.

"Funding and liquidity became critical challenges for our clients to solve," Jim Esposito, Goldman's co-head of financing, said in an interview. "As clients prioritized accessing the debt markets with much greater intent, we followed our clients."

Mr. Esposito, along with his co-head, Marc Nachmann, was recently named to Goldman's management committee.

So far, the effort appears to be paying off, which the bank's fourth-quarter earnings report Wednesday is expected to show.

Goldman had $1.03 billion in debt-underwriting revenue in 2015, fifth among Wall Street banks, according to Dealogic. That's up from ninth in 2009.

Goldman still faces an uphill battle in winning debt business over its bigger bank rivals, which do four to five times as much lending to many big clients.

Goldman executives concede passing J.P. Morgan, Citi and BofA is highly unlikely. But they see opportunities to take a bigger slice of the business of European banks, many of which are pursuing sweeping restructuring plans amid regulatory pressure.

Providing debt financing for riskier companies is becoming more fraught, too.

Uncertainty over interest rates, economic growth in China and plummeting commodity prices has turned markets choppier. In some cases, companies and their banks have had to pull debt offerings amid the tumult.

Last year, for example, Vista Equity Partners postponed a debt sale to finance its buyout of Solera Holdings. In that deal, Goldman provided the bridge loan. When bridge loans aren't replaced with bond sales, banks are forced to keep the debt on their own balance sheets, tying up capital and risking losses.

Still, none of that has deterred the effort, spearheaded in part by David Solomon and John Waldron, co-heads of investment banking who have deep roots in the debt-financing business.

Part of the push, according to the men and others at the firm, involves a subtle but meaningful shift in how Goldman approaches its core offering of financial advice, from which it raked in $809 million in the third quarter alone. Goldman has historically focused on winning assignments from companies that are for sale, in part because that is a safer bet than being with a bidder when there are multiple suitors.

But increasingly, Goldman has sought to align itself with buyers. The adviser to the buyer often also provides debt to help finance the deal, which in turn can lead to other assignments, for example protecting against currency or interest-rate risks. All told, fees from these additional assignments can bring in as much as three times what can be earned from advising, bankers say.

Bridge loans are designed as a placeholder until the acquirer raises money through bond sales. Typically, firms that underwrite those bond sales also get a leg up in trading the securities after they are issued. That is because investors tend to flock to the underwriters to buy or sell them, as those firms are more likely to have them in stock or know where to get them.

Goldman had a front-row seat for the windfall banks can earn when they are with the buyer in a big acquisition: They were on the other side of the table when Actavis PLC, a drugmaker, hired J.P. Morgan to advise on its $66 billion takeover of Allergan in 2014--and lead a $21 billion bond deal.

J.P. Morgan earned $65 million in merger-advisory fees and the lion's share of the $133 million divvied up by the bond deal's underwriters, according to a regulatory filing and analysts' estimates.

Stocks mentioned in the article
ChangeLast1st jan.
PERRIGO COMPANY PLC -1.03% 47.08 Delayed Quote.-7.92%
THE GOLDMAN SACHS GROUP, INC. 4.92% 166.02 Delayed Quote.-31.18%
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Financials (USD)
Sales 2020 33 363 M
EBIT 2020 9 686 M
Net income 2020 5 577 M
Debt 2020 274 B
Yield 2020 3,10%
P/E ratio 2020 9,53x
P/E ratio 2021 7,22x
EV / Sales2020 9,91x
EV / Sales2021 9,34x
Capitalization 57 090 M
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Technical analysis trends THE GOLDMAN SACHS GROUP, I
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Income Statement Evolution
Consensus
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Mean consensus OUTPERFORM
Number of Analysts 26
Average target price 214,69  $
Last Close Price 166,02  $
Spread / Highest target 74,7%
Spread / Average Target 29,3%
Spread / Lowest Target -7,24%
EPS Revisions
Managers
NameTitle
David Michael Solomon Chairman & Chief Executive Officer
John E. Waldron President & Chief Operating Officer
Stephen M. Scherr Chief Financial Officer & Executive Vice President
Marco Argenti Co-Chief Information Officer
Atte Lahtiranta Chief Technology Officer
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