Goldman Sachs executed some EUR10 billion (USD8.47 billion) of euro interest-rate swaps and several billion euros (notional) of basis swaps a week ago Friday in the London market. The move sparked speculation that Goldman was positioning to provide a hedge to cover the financing of a cross-border M&A transaction, widely believed to be on behalf of German utility E.ON. The trades "looked and smelt like an investment banking deal," according to City swappers. E.ON is known to have a substantial war chest, is believed to be interested in making a U.S. acquisition and has a relationship with Goldman. Officials and press officers at Goldman Sachs did not return calls. E.ON officials declined to comment.
In the swaps Goldman Sachs paid fixed, around the 5.55% level, and received floating. It also entered basis swaps in which it paid floating euros and received floating dollars. The net exposure would position it to provide an interest-rate swap in which the counterparty pays fixed euros and receives floating dollars. This would suit the investment profile of a European company looking to make a dollar-denominated acquisition, traders explained.
Interest-rate swap spreads widened across maturities on the back of the trades. For example the spread between 10-year swaps and Bund futures jumped to 45 basis points a week ago Friday from 41bps immediately before the swaps were transacted, and then reverted to 41bps. Traders rejected the idea that the position could have been for Goldman's own book. If that were the case, they argued, the firm would have executed the position incrementally and avoided moving the market so dramatically. One trader added, "you don't waste 8bps if it's your position." He explained the bank needed to hit all offers around the 5.55% area and therefore could not execute the trade subtly.
