Goldman blurs lines with structured bond

Fri Jun 27, 2014 11:55am EDT

* 1bn issue to be backed by asset-backed securities

* Deal expected to achieve lower funding cost for Goldman Sachs

* Complex nature of the trade seen as a deterrent for investors

By Helene Durand and Anil Mayre

LONDON, June 27 (IFR) - In a move some could see as a return to the bad old days of structured credit, Goldman Sachs is hoping to sell a highly complex transaction that blurs the lines between covered bonds and securitisations.

The deal, which could arrive as early as next week, is backed by a portfolio that includes a variety of asset-backed bonds. That may prove controversial as some will feel it resembles the kind of CDO transaction blamed by many for contributing to the 2008 financial crisis.

The US bank began a roadshow this week for the so-called Fixed Income Global Structured Collateral Obligation (FIGSCO) 2014-01, through Barclays, Credit Agricole, Natixis, UBS and its own investment banking unit. According to S&P, the deal is expected to be a 1bn seven-year trade, from a 10bn programme.

As a pure investment bank, Goldman Sachs does not originate mortgages typically used for covered bonds or RMBS deals. But it does originate other assets that it is looking to fund more cheaply while terming out its debt profile.

However, convincing investors to look through the layers of complexity could prove difficult.

"This is a highly customised transaction with many moving parts, which will be much less liquid than covered bonds covered by a legal framework," said Dierk Brandenburg, a senior bank credit analyst at Fidelity.

"The collateral is of poor quality and one is relying on the support structure that is in turn very complex with multiple support mechanisms."

A fund manager echoed this view, saying he had yet to figure out whether he could actually invest in the bonds and which fund in his portfolio it would fit in.

"There is a sense of deja vu and this looks like some of the deals we saw before the financial crisis, which had the same total return swaps construct, although I may be too harsh and would have to look more closely at the structure," the fund manager said.

Some say that the deal, which is in part aimed at covered bond investors, might not work with those buyers.

"We have seen the likes of Commerzbank do these structured SME covered bonds or NIBC use the pass-through structure, but while the transactions got done, we also saw that for many covered bond investors moving away from the strict covered bond legal framework is quite a stretch," a banker said.

The deal will not fit in the covered bond legal framework because the assets would not be eligible for a cover pool as defined by European regulations. The bonds are also unlikely to be repo-eligible at the ECB; nor will they be likely to count in calculating a bank's liquidity coverage ratio.

They will probably have a 20% risk-weighting and be treated as Triple A corporate exposure under Solvency II.

FILLING A GAP

However, Goldman Sachs is hoping to fill a void in the market where covered bond issuance is dwindling and there are fewer Triple A rated assets. The trade would be expected to come at a more attractive spread than a simple Triple A bond.

"This is an interesting trade, especially if you look at what's going on in the world," said another banker. "This will offer value and we expect the big liquidity books to get on board."

On the negative side, the deal requires more knowledge and credit work than a plain Triple A trade. "We have been here before: Triple A with a spread," the banker said.

Market sources say potential buyers may be convinced to look past the portfolio composition in view of the techniques used to construct the security package.

The deal benefits from a total return swap from Goldman Sachs Mitsui Marine Derivative Products, rated Triple A by S&P, which in turn is guaranteed by Goldman Sachs and Mitsui Sumitomo Insurance. The TRS matches all the income associated with the assets over the life of the deal with the payments due on the bonds.

Investors have a claim against GSMMDP. If that claim fails, they then have an unsecured claim against Goldman Sachs and Mitsui Sumitomo Insurance.

The assets will be marked daily on an actual price, rather than a model basis, and at the price at which they would have to be sold. This pricing is also checked by an external party and the lower of the two prices is taken.

And more collateral will be added if the existing securities decline in value as there is a minimum 5% overcollateralisation requirement. In addition, the TRS matches asset and liability returns.

WHAT'S IN THERE?

For some market players the deal resembles a structured covered bond, in that it has a line of recourse to the underlying assets and the issuer in the event things turn sour, but for others it smells like a collateralised debt obligation. The portfolio could, according to sources away from the deal, be backed predominantly by asset-backed securities.

An illustrative pool cut shows a 35% exposure to RMBS, 20% consumer ABS, 20% aviation bonds, 0.3% CLOs and 24% unsecured corporate issues, according to sources away from the trade.

By currency, the breakdown of the pool might be weighted towards US dollars at 40%, followed by euros with 24%, sterling with 20% and Australian dollars with 15%. By country, the US could account for 30%, followed by the UK and Portugal with 20% each, Australia with 15% and the Gulf with 10%. (Reporting by Helene Durand and Anil Mayre, editing by Matthew Davies)