Goldman gets reward for taking year-end block risk
Why would Goldman Sachs take on a big chunk of risk just before year-end? That’s what the Wall Street investment bank did when it agreed to place a block of Volvo shares for Renault, taking a near euro 1.5 billion of exposure onto its books. A sudden dip in the equity markets would have made it hard to shift the stock - leaving Goldman with a loss that would have been hard to make good before its books closed for 2012.
One reason for going out on a limb may be league table credit. As of December 7, Goldman Sachs was trailing Deutsche Bank for equity and equity-related offerings by $64 million worth of deals, Thomson Reuters data show. The Volvo deal sees Goldman leapfrog its German rival right before the wire. If block trades feel especially risky in December, the rewards are bigger too: the likelihood of other banks landing big equity capital markets deal to overtake Goldman now are slim.
With ECM activity muted for much of this year, block trades have been a vital - if risky — way for banks to stay in the hunt. They have accounted for more than 40 percent of all equity offerings, up from less than a fifth in 2007, according to data provider Dealogic.
Goldman’s decision to take on the Volvo block trade was still ballsy, given recent events. HSBC, for example, was stuck on November 22 with a 5.4 per cent stake in travel software group Amadeus after failing to find buyers. True, in the case of Volvo, Goldman has the comfort of pricing the deal at a larger discount — 3.8 per cent below the previous closing price against the 1.9 per cent HSBC secured on Amadeus. But the trade in Volvo shares is more than three times the size of the Amadeus transaction.
The Volvo sale also helps Renault at a tough time for the carmaker. Renault’s European sales slumped 18 percent in the year to the end of October and the company intends to use the proceeds of the stake sale to invest. Handing Renault the chance to make a fresh start in 2013 should in itself help Goldman’s chances of winning future investment banking business. There’s more to this industry than league tables, after all.
Operating margins down 230 basis points q-o-q on higher employee costs and other expenses
Analysts expect volume pressure to continue; profit growth likely to be intact