Goldman Sachs is beefing up its capacity to provide credit for investment grade-clients. The firm recently sold $750 million of notes through William Street 2005 1/2 to take its William Street Funding Corp. program toward $6 billion. According to Goldman's 2004 first quarter results, long-term debt associated with William Street stood at $3.09 billion.
"There has been an increase in William Street and it is growing as planned," said Thomas Foley, a Standard & Poor's analyst that covers the investment bank. A managing director at a foreign bank prominent in investment-grade lending added that Goldman, together with the other investment banks, is playing more regularly. Not trying to win lead roles but committing and holding credit at the request of clients to justify relationship business. A Goldman spokesman declined to comment on the firm's lending practices.
Goldman established William Street two years ago in part fearing that commercial banks would use lending muscle to snare investment banking business after the rollback of Glass Steagall. It was reversing a policy adopted in 2000 to veto CP backstop lending due to irrational pricing and Goldman's relatively small balance sheet.
To solve the balance sheet issue, Goldman struck a series of deals with Sumitomo Mitsui Financial Group (SFMG) whereby the Japanese bank provided first loss credit protection on loans Goldman made to investment-grade clients and in return the U.S. bank purchased approximately $1.27 billion of convertible preferred stock, which Goldman can now swap for an 80% gain. The agreement was for five-years with automatic one-year extensions for up to 15 years as long as Goldman holds 50% of the stock initially issued. Importantly, the debt is non-recourse for Goldman and through leverage the bank can lend multiples of the amounts issued under the William Street entities to clients.
Goldman has since made high-profile commitments to Reuters and Telenor, but in recent months has also committed to credit lines for MeadWestvaco Corp., Time Warner, Computer Associates, Marsh & McLennan Co., Alberto Culver and Anthem. Foley explained that it has not been rapid growth as it is still being used judiciously, but "the product gives Goldman flexibility in the cases where the customer and there are some cases--where the customer wants it for the relationship. It's just another tool for them to have in their toolbox." This is a sentiment shared by a commercial banker. "There are many clients that would pick Goldman to be advisor and there are some that might put them in the penalty box [for not lending].The structure helps take it off the table," he stated.
Last month, Goldman was named sellside financial advisor for MeadWestvaco when Cerberus Capital Management bought its paper manufacturing assets for $2.3 billion. Robert Birkenholz, MeadWestvaco's treasurer, declined to comment on its relationship with the bank group.
Competitors at commercial banks have argued that judicious lending will not be enough for Goldman to maintain its dominant position in global M&A. They point to gains made so far in investment-grade debt underwriting "They are hoping they can hold us off with that kind of ability," said a lender at a major U.S. commercial bank. "We are just getting part of the jigsaw."
But Foley is not convinced that Goldman or the other investment banks are necessarily in danger of losing more lucrative franchises. "The story a few years back grew that the investment banks would lose a lot of market share and that really has not happened. The competitive threat was not as severe as anticipated," said Foley. "In other types of securities underwriting, such as equity underwriting, this strategy has not worked very well for large banks to gain market share by offering large credit facilities. It's worked almost exclusively in the investment-grade debt arena, which by itself has pretty poor pricing anyway."
He added that from the corporation's point of view, you need expertise from your investment bank. "An investment bank or a commercial bank that simply provides credit, which does not have the expertise to effectively execute and underwrite for equity or advise on an M&A deal, is not providing what a corporation needs. It's not sufficient for a getting a good transaction completed," he added. But part of the reason is readily available credit versus the crunch of three years ago. "I think you would have had fewer corporations scrambling to put credit lines in place."
