Bloomberg News

Goldman Topples Deutsche Bank in Europe Junk Bond Underwriting

July 14, 2011

July 14 (Bloomberg) -- Goldman Sachs Group Inc. unseated Deutsche Bank AG as Europe’s top underwriter of high-yield bonds in the first half.

The six-month income surge gives Goldman Sachs an edge as high-yield issuance starts to slow amid Europe’s spreading sovereign debt crisis. The U.S. bank underwrote 10.6 percent of the record $54 billion of deals in the first half, according to data compiled by Bloomberg. Deutsche Bank fell to second place.

“Underwriters made a lot of fees in the first half,” said Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm. “The high-yield bond rally isn’t sustainable, certainly not in Europe. Now that we have a lot of uncertainty and a little bit of panic in Europe, investors are going to avoid these high-yield deals. You could have impaired earnings for a long time.”

High-yield issuance froze this week amid rising concern European policy makers will fail to stave off a Greek default and limit contagion to the rest of the region. Investors demand 50 basis points more than at the start of July to buy European speculative-grade bonds, a premium to government debt of 620 basis points, a Bank of America Merrill Lynch index shows.

“We’ve seen some significant weakness in performance of late in line with growth fears and the general risk-off trend as a result of the Greek crisis,” said Suki Mann, London-based senior credit strategist at Societe Generale SA. Mann expects a decline in second-half issuance to 19 billion euros ($27 billion) from 26 billion euros in the first half. Moody’s Investors Service tallied $58 billion of sales in the first half and expects full-year volume to surpass 2010’s record $65 billion, according to a report today.

Fees

European underwriters, which don’t report fees on individual deals, typically charge issuers at least 2.5 percent of a high-yield borrowing, according to Tavakoli. High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

Goldman Sachs reported $1.2 billion in revenue from debt underwriting in 2010, flat to 2009. The bank was seventh among European junk bond underwriters last year, Bloomberg data show. It was last No. 1 in the second half of 2003.

“The high-yield product serves as a very good tool to help us in client-acquisition efforts,” said Denis Coleman, head of credit finance for EMEA at the New-York-based bank. “We have an expectation of a longer-term shift in favor of institutionally raised debt capital in lieu of more traditional bank finance.”

Loan Surge

Goldman managed 33 deals in the first half of the year, including Boparan Group’s $1.1 billion sale of euro- and pound- denominated bonds in April, Bloomberg data show. The bank also managed a 250 million-pound ($400 million) issue for U.K. budget clothing retailer Matalan Group Ltd.

Deutsche Bank led a 67 percent increase in leveraged loans in Europe, displacing Goldman Sachs as the top arranger. Issuance of debt mostly used for private-equity led takeovers jumped to $78 billion in the first half, Bloomberg data show.

“We are living in times of volatility but we will continue to see decent loan and bond volumes through the second half of this year,” said Nick Jansa, European head of leveraged debt and capital markets at the Frankfurt-based firm.

Deutsche Bank helped Continental AG, Europe’s second- largest car-parts maker, cut its borrowing costs by arranging 565 million euros of loans to help refinance about 6 billion euros of debt stemming from a 2007 acquisition of Siemens AG’s VDO unit.

“We felt that the timing was right because we didn’t know how secure the market conditions would be in the course of 2011 and afterwards,” said Stefan Scholz, group treasurer of Continental, based in Hannover, Germany. “Due to the euro-zone sovereign crisis, it is not possible to predict.”

--Editors: Faris Khan, Cecile Gutscher

To contact the reporters on this story: Stephen Morris in London at smorris39@bloomberg.net; Ben Martin in London at bmartin38@bloomberg.net.

To contact the editors responsible for this story: Faris Khan at fkhan33@bloomberg.net; Paul Armstrong at Parmstrong10@bloomberg.net.


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