IFR-Goldman tempts retail with 50-year money

Wed Oct 19, 2011 11:28pm IST

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by Timothy Sifert

NEW YORK, Oct 19 (IFR) - Fresh off its underwhelming third-quarter earnings, Goldman Sachs is marketing a US$250m offering of US$25-par, 50-year notes to investors. The deal, in the market today, takes advantage of the flattening Treasury curve, and a pocket of demand usually left alone by the investment bank: retail buyers.

Opting for a retail-focused bond offering, instead of the more common institutional target audience, allows Goldman (GS.N) to diversify its debt in terms of maturity and investor base. This is only its second offering of senior unsecured bonds to somewhat underserved retail investors.

Goldman's last trip to the fixed-rate institutional market was on July 22, when it printed a US$2.75bn 5.25% 10-year bond at Treasuries plus 230bp.

Goldman is sole books on the retail trade but, unlike on institutional offerings, it has enlisted Wells Fargo as physical books, and Bank of America Merrill Lynch, Citigroup and UBS as joint leads.

An issuer can also generally get away with a tighter coupon in retail compared with the institutional market. However, extra fees for retail distribution cancel the savings out somewhat. In a self-led institutional bond offering, the firm keeps most of the economics. In a retail deal, Goldman has to relinquish some fees to competitors that are better positioned with retail brokers, such as Wells Fargo, BofA, Citi and UBS.

Price talk on the trade is 6.50%-6.625%. The deal, with A1/A/A+ ratings, is expected to price today. Proceeds will be used for general corporate purpose. The notes are redeemable at par any time on or after November 1 2016. So, although they are billed as half-century bonds, the securities are callable at par after five years.

PAST PERFORMANCE MATTERS

This is Goldman's second 50-year bond issue in about a year. In October last year it hit the market with another retail-targeted, 50-year senior unsecured bond -- its first ever.

Talked as a US$250m tranche, typical of retail deals, last year's trade was eventually expanded. Keen on partaking in a unique security, investors flooded the deal and the tranche ballooned to US$1.3bn.

That sum the firm might have procured in the institutional market, but without the extra diversification. Retail investors comprised most of the book, though institutional investors -- on the hunt for yield last year as this year -- also bought much of the trade.

Today's deal is expected to take shape similarly.

Goldman's US$1.3bn offering of 52m shares last year priced to yield 6.125%. Price talk of 6.25% was eventually revised to 6.125%6.25%. The final book was about US$2bn.

This year, however, Treasury yields are more in Goldman's favour. On October 26, when the deal priced, the 30-year Treasury, on which the 50-year bond is based, closed at 4.00. This afternoon they were changing hands at 3.215%, a full 78bp tighter.

EARNING INVESTORS

Investors interested in today's deal will have to give the firm a pass on earnings, however. Yesterday, Goldman reported a net loss of US$393m for the third quarter on revenues of US$3.59bn. Larger-than-expected losses in its investment banking and lending division, and higher non-compensation costs, were responsible for much of the quarterly loss. Meanwhile, investment banking revenues were lacklustre.

"Investment banking revenues declined by 46% sequentially to $718m versus our expectation of a 34% decline," according to a Sandler O'Neill research report.

(Timothy Sifert is a senior IFR reporter; Tel: 1-646-223-8813))

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