Goldman to test appetite for new structured product

Mon Jun 23, 2014 12:06pm EDT

LONDON, June 23 (IFR) - Goldman Sachs will start marketing a new type of bond transaction this Wednesday that straddles asset categories and features an unusual triple-recourse structure, as it seeks to take advantage of investors' demand for Triple A rated assets.

The so-called Fixed Income Global Structure Collateral Obligation (FIGSCO) issuer is a joint venture between Goldman Sachs and Mitsui Sumitomo Insurance and will provide investors with a triple recourse if things turn sour.

Under the structure, investors will have recourse to the pool of assets backing the trade, as well as having an unsecured claim against Goldman Sachs and Mitsui.

This triple-recourse mechanism makes the transaction akin to a covered bond issue, where investors have a claim against the assets and the issuer and, indeed, covered bond investors will be among the targeted roadshow audience.

The transaction is expected to diversify Goldman's funding sources and the outright pricing level is expected to be competitive with senior funding.

The deal has been structured in response to a lack of supply of Triple A rated assets and net negative covered bond supply. The programme size being set up is 10bn.

Barclays, Credit Agricole-CIB, Natixis, Goldman Sachs and UBS will hold investor meetings running from Wednesday until July 1.

But while the transaction uses some covered bond technology, it does not have all the bells and whistles traditionally attached to the sector.

There is no legal framework; the assets would not be eligible for a cover pool as defined by European regulation; the bonds will unlikely be repo-eligible at the ECB; nor will they likely count for the Liquidity Coverage Ratio. They will probably have a 20% risk-weighting and be treated as Triple A corporate exposure under Solvency 2.

TRIPLE A WITH A SPREAD

The deal could offer buyers a much more attractive spread than a sovereign trade, while filling a supply gap in the covered bond primary market, according to a FIG syndicate banker.

"This is an interesting trade, especially if you look at what's going on in the world," he said. "This will offer value and we expect the big liquidity books to get on board." On the negative side, the deal may require more knowledge than a plain Triple A trade.

"We have been here before: Triple A with a spread," the banker said, "which is why the roadshow will be extremely important and investors will have to do their homework."

Another banker said the complex nature of the trade was a negative. "They clearly want to leverage the success of covered bonds, but the complexity alone is negative."

The S&P Triple A is achieved thanks to a total return swap provided on it by Goldman Sachs Mitsui Marine Derivative Products, or GS MMDP, a joint venture with strong credit ratings. For some, this has echoes of the much maligned CDO market.

Meanwhile, the deal's collateral cashflow is likely to come from a variety of securities from Goldman Sach's long-term funding operations.

There is no disclosure yet, but that could mean the collateral could include bonds, derivatives and loan assets, which sources away from the deal say resembles something between a structured covered bond and a CDO structure.

FIGSCO would be more dynamic than a typical covered bond pool, though, as assets would be marked to bid on a daily basis and topped up to keep overcollateralisation above 5%.

More collateral will be added to the pool if the existing securities decline in value. A reputable international asset monitor will be tasked with assessing the valuation of the pool on a monthly basis.

The items would not be disclosed line by line, but investors would be informed of the type of assets, the country of origin, the proportion of fixed and FRN assets and the level of concentration risk. (Reporting By Helene Durand, Anna Brunetti, Editing by Philip Wright)

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