A Positive Sign For the Future
􀂄 GS Issued $2 Billion of 10-Year Notes Without FDIC Backing
GS issued $2 billion of 10-year unsecured fixed-rate notes with a coupon of 7.5%,
or at a spread of ~500 bps over treasuries. Importantly, this debt issue was not
backed by an FDIC guarantee, so given the strong demand for the paper we think
this could be a small positive step toward the opening of unsecured debt markets to
financial firms, though given the steep price there is still a way to go.
􀂄 Cost of Debt is High and Amount is Small, But It Gets The Ball Rolling
The 500 bps spread over treasuries is very steep by historical standards (GS was
able to issue at 200 bps over in early ‘08), and $2 bn is just 1% of Goldman’s total
long-term debt. Still, we think the fact that GS was able to place the paper at all is a
positive as a month ago a deal would have come at an even higher cost, if at all.
􀂄 A Larger Share of Stable Revenues May Still Be Needed
While GS has meaningfully trimmed leverage and risk on its balance sheet and the
debt issuance is a positive step, we still think the market may want to see Goldman
generate a larger share of revenues/earnings from stable sources before its debt
spreads return to reasonable levels, so a future deal could still be in the works.
􀂄 Valuation: Neutral Rating, But Prefer GS Over the Banks
We think GS is well positioned for the long term and has the ability to wait for the
right opportunities to come along to shift the business mix toward more stable
revenues. However, given that earnings and returns will be challenged in 2009 we
remain Neutral. Our PT goes to $88, based on 1.0x tangible book (up from 0.75x
given their ability to tap the debt markets).