Copying and distributing are prohibited without permission of the publisher.

Watermark

Spread beats brand for Goldman’s “Covered Obligation”

By Bill Thornhill
24 Jun 2014

Goldman Sachs may have been hoping that it could get away with calling its newly structured triple recourse hybrid a covered bond. Though it is being marketed to covered bond investors, FIGSCO is clearly nothing like a classical covered bond. But Commerzbank, NIBC and NordLB all encountered controversy when they successfully issued innovative deals, suggesting the clumsily named acronym may be a success – especially in an environment of furious yield chasing and a shrinking triple A universe.

Goldman Sachs is due to go on the road from Wednesday with its newly structured Fixed Income Global Structured Covered Obligation (FIGSCO), a bond backed by other bonds, loans, EM sovereigns and assorted other assets, but with recourse back to Goldman Sachs, and an overcollateralisation test.

When the deal was first conceived a year ago, other issuers like Commerzbank and NIBC broke

covered bond boundaries with successful deals that were marketed as covered bonds. Goldman has already accepted it cannot sell this as “covered”, but the deal should still get done as it offers triple A with a spread.

For Commerzbank, issuing a deal backed by SME assets precluded its inclusion into the covered bond world as defined by the Capital Requirement Directive. It didn’t qualify for a Label from the European Covered Bond Council, but it was included in the Barclays covered bond index and got favourable treatment (though not top covered bond treatment) from the European Central Bank for repo purposes.

NordLB’s Flugzeug Pfandbrief also broke the rules about which assets could back a covered bond. Its aircraft collateral can fly anywhere in the world. But the deal was structured within a covered bond legal framework considered best in class. German investors, which form the backbone of demand for covered bonds everywhere, were happy to buy the deal even if others were not.

   

After a rapturous inaugural reception for its conditional pass-through covered bond structure (instead of the bullets or soft bullets that dominate the public market), NIBC came back with a second deal this year, making it the only innovative issuer to have so far managed a return visit. The deal was accepted as a fully-fledged covered bond, but some investors were up in arms about its structure because the maturity payment structure increased the risk they would not be redeemed on schedule.   

So Goldman may have been thinking it could follow in these hallowed footsteps and call its deal a covered bond, instead of the clumsily named acronym, FIGSCO. But missing out of the aura of the covered bond brand probably doesn’t matter.

Rating agencies have assigned no uplift to the collateral pool because they have no methodology in place to rate it. That means rating-sensitive investors that this deal is targeting are essentially buying into the solidity and credibility of the guarantee that gives the rating.

This guarantee is provided by a joint venture between Goldman Sachs and Mitsui Sumitomo Insurance Corp which called Mitsui Marine Derivative Products. The snappily titled GSMMDP is rated AAA with Standard and Poor’s and Aa2 with Moody's.

The motley selection of fixed income assets backing FIGSCO may not be what people want, and the recourse may be complex but we live in unusual times.

Sovereign rating downgrades have shrunk the supply of triple-A rated debt, particularly in covered bonds where the net negative supply is expected to triple from around minus €12bn today to a negative of about €36bn by the end of this year. FIGSCO will offer triple A with a spread, a vanishingly rare combination today.

By Bill Thornhill
24 Jun 2014