Breakingviews-Goldman gets reward for taking year-end block risk

Thu Dec 13, 2012 10:37pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Dominic Elliott

LONDON, Dec 13 (Reuters Breakingviews) - Why would Goldman Sachs (GS.N) take on a big chunk of risk just before year-end? That’s what the Wall Street investment bank did when it agreed to place a block of Volvo (VOLVb.ST) shares for Renault (RENA.PA), taking a near 1.5 billion euros of exposure onto its books. A sudden dip in the equity markets would have made it hard to shift the stock – leaving Goldman with a loss that would have been hard to make good before its books closed for 2012.

One reason for going out on a limb may be league table credit. As of Dec. 7, Goldman Sachs was trailing Deutsche Bank (DBKGn.DE) for equity and equity-related offerings by $64 million worth of deals, Thomson Reuters data show. The Volvo deal sees Goldman leapfrog its German rival right before the wire. If block trades feel especially risky in December, the rewards are bigger too: the likelihood of other banks landing big equity capital markets deal to overtake Goldman now are slim.

With ECM activity muted for much of this year, block trades have been a vital – if risky – way for banks to stay in the hunt. They have accounted for more than 40 percent of all equity offerings, up from less than a fifth in 2007, according to data provider Dealogic.

Goldman's decision to take on the Volvo block trade was still ballsy, given recent events. HSBC (HSBA.L), for example, was stuck on Nov. 22 with a 5.4 percent stake in travel software group Amadeus after failing to find buyers. True, in the case of Volvo, Goldman has the comfort of pricing the deal at a larger discount – 3.8 percent below the previous closing price against the 1.9 percent HSBC secured on Amadeus. But the trade in Volvo shares is more than three times the size of the Amadeus transaction.

The Volvo sale also helps Renault at a tough time for the carmaker. Renault's European sales slumped 18 percent in the year to the end of October and the company intends to use the proceeds of the stake sale to invest. Handing Renault the chance to make a fresh start in 2013 should in itself help Goldman’s chances of winning future investment banking business. There’s more to this industry than league tables, after all.

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CONTEXT NEWS

- French carmaker Renault disposed of a 6.5 percent stake in Volvo on Dec. 13 raising about 1.5 billion euros. The sale, which was placed by Goldman Sachs at a 3.8 percent discount to the previous closing price, completes Renault's exit from the Swedish truckmaker. The French company previously sold a 14.9 percent stake in Volvo worth about 3 billion euros in October 2010.

- HSBC was left with a 5.4 percent stake in Spanish travel software group Amadeus after failing to sell a block of stock to institutional investors on Nov. 14.

- Reuters: Renault raises 1.48 bln eur from Volvo stake sale [ID:nL5E8ND2NW]

- For previous columns by the author, Reuters customers can click on [ELLIOTT/]

(Editing by Chris Hughes and David Evans)

((dominic.elliott@thomsonreuters.com))

((Reuters messaging: dominic.elliott.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS RENAULT/VOLVO

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