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Bankers push limits in hot debt markets

LONDON (Reuters) - A surfeit of liquidity in the financial markets is tempting bankers to underwrite and finance deals that may come back to haunt them, a top banker at Goldman Sachs said on Thursday.

The Goldman Sachs Group headquarters at 85 Broad Street in New York. A surfeit of liquidity in the financial markets is tempting bankers to underwrite and finance deals that may come back to haunt them, a top banker at Goldman Sachs said on Thursday. REUTERS/Peter Morgan

Eugene Leouzon, the chief underwriting officer for Europe and Asia at Goldman Sachs GS.N who sits on the investment bank's global credit committee, said the current conditions were unparalleled in his experience of investment banking.

“The markets are really, really red hot,” said Leouzon, who approves new loans and debt deals to fund mergers and acquisitions (M&A).

“The things we are seeing being done, both on the investment grade side and the non-investment grade side, are I would say borderline stupid,” he told the Reuters Investment Banking Summit in London.

“There is just too much capital going after too little by way of deals,” said Leouzon, who also manages the firm’s underwriting and lending portfolio in Europe and Asia.

But Leouzon said the outlook was for a strong level of new deals going forward, led by lending money to fund leveraged buyouts and cash mergers and acquisitions.

RECORD YEAR SEEN

Several bankers have told the Reuters Summit the volume of deals this year will surpass the last boom year of 2000, when around $2.5 trillion dollars of deals were done.

Research firm Dealogic estimates Europe has seen $1.39 trillion of M&A deals so far this year, more than the $1.17 trillion in the United States.

“It looks a lot like 2006 is going to meet or exceed a lot of the 2000 benchmarks. We’ve already done over 500 $1 billion-plus deals, which is about what they did in the year 2000,” said Tom King, head of European investment banking for Citigroup.

“You’re coming off the best year ever, and everybody has blown through their budgets this year, and they are now looking to next year,” said Leouzon, who joined Goldman Sachs in 1999 in the Leveraged Finance Capital Markets unit.

Competition among bankers chasing big bonuses is also likely to keep the pressure on doing deals.

“The guys who are arranging and underwriting deals, be it investment grade or non-investment grade bonds, equity or bank debt, they are all going to be competing hard against each other,” he said.

Even with interest rates going up, Leouzon said he only expected to see a soft landing in the world’s major economies, and believed the underlying conditions in the financial markets were not going to change too much.

“Unless there is a wave of defaults, big ones, and people start losing money and then start reining back can we sort of bring things down,” he said.

But the man who sits on the capital committee of one of the world’s leading investment banks and looks closely at many of the deals being done is nervous.

“We, as an industry, are doing things that we shouldn’t be doing,” he said.

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