Goldman Builds Bridge-Loan Business With Amazon, Discovery
(Bloomberg) -- Goldman Sachs Group Inc.’s longtime dominance of the takeover advice business is finally translating into some success for its efforts to finance those deals.
The bank has provided short-term bridge loans to help fund two of this year’s biggest deals, including Discovery Communications Inc.’s buyout of Scripps Networks Interactive Inc. and Amazon.com Inc.’s purchase of Whole Foods Market Inc. It’s been an important segment at a time when big deals involving U.S. companies are down by a third from a year ago.
Putting up the cash gives Goldman Sachs a chance to capture revenue at just about every step in the merger process: fees from advising on the deal, laying out the bridge financing and then underwriting a sale of the debt to pay itself back. It also helps the firm’s investment-grade bond-trading business, where competitors with bigger balance sheets have had an advantage in arranging and then buying and selling the debt in the secondary market. But it also means taking on more risk using taxpayer-backed deposits.
If you get it right, “it’s very likely that you can hang onto three pieces of financing in one deal,” said Roy Smith, a former Goldman Sachs partner who’s now a finance professor at New York University’s Stern School of Business. “It’s a natural business and a natural place for them to be.” If you get it wrong, though, “bridge loans can hand your head to you,” Smith said.
Bridge loans are short-term agreements in which banks commit to financing the first few months of an acquisition until more permanent funds from bonds or asset sales can be lined up. They typically generate 40 to 80 basis points in fees, plus interest on the borrowed funds. Industry tallies and rankings vary widely for bridge loans, which are sometimes private and have long been dominated by commercial banks like Bank of America Corp. and JPMorgan Chase & Co.
But Goldman Sachs’s growth in that area has helped boost its overall debt underwriting revenue to $1.36 billion in the first half. That’s on pace to top last year’s record $2.45 billion, which was almost double what the bank produced in 2010. Morgan Stanley, with a similar level of deposits, generated $1.37 billion in 2016, little changed from six years earlier.
While many of the loans are rated investment grade, including those to Amazon and Discovery, they can be risky. In the rush of competition, lenders can loosen loan covenants, deals can get delayed or companies may be unable to retire the bridge loans if bond markets decline. It’s not clear to what extent Goldman Sachs has taken more risk as it’s climbed the rankings.
The bank provided $9.6 billion to Discovery for the Scripps deal announced in July. The month before, it helped finance Amazon’s $13.7 billion Whole Foods purchase. Those rank behind the $15.7 billion bridge that Citigroup Inc. set up for medical devices provider Becton, Dickinson & Co. in April for its acquisition of C.R. Bard Inc.
Susie Scher, co-head of Americas financing for Goldman Sachs, sees more deals to come.
“It took clients a while to say, wow, is Goldman in the loan business?” Scher said in an interview at the bank’s Manhattan headquarters. “As it turns out, we are very much in the bridge business. We can commit as much as anybody relative to the size of our equity capital, and we can commit more quickly at very aggressive terms.”
That’s notable because Goldman Sachs, lacking the mammoth deposit bases of JPMorgan Chase & Co. and Citigroup didn’t have funding in the past to support a business like bridge financing, which requires quick, large outlays. This changed as Chief Executive Officer Lloyd Blankfein, 62, used a banking license granted in 2008 to attract more deposits.
Goldman Sachs’s acquisition-finance business is more episodic and opportunistic, driven by events rather than long-standing relationships when compared with its larger rivals, said Michael Wong, a Morningstar Inc. analyst. Still, Wong said, “developing a deposit base after the financial crisis allows them to compete much better with the larger commercial banks.”
The bank started building a debt franchise around 2003, partnering with Sumitomo Mitsui Financial Group Inc., but it wasn’t until the credit crisis hit that the business took off in earnest. Until then, markets had been so robust that investment-grade companies didn’t need committed financing.
One deal that sticks in Scher’s mind is Pfizer Inc.’s $68 billion takeover of Wyeth, announced in January 2009 in the depths of the financial crisis. Pfizer was cutting banks handling its $25 billion bridge loan in half to five, and Scher needed permission from Goldman Sachs’s then-chief financial officer to stay with it.
“I had to physically go to David Viniar’s officer and ask if we could go from $2.5 billion to $5 billion,” Scher said. “That felt huge.”
Fast forward eight years. Goldman Sachs, with Bank of America Corp., extended one of the biggest bridge loans of the year in June to Amazon for a deal that came together in days. Goldman Sachs was Amazon’s only M&A adviser and could’ve provided the financing for Whole Foods on its own, Scher said. This week’s bond sale puts Goldman Sachs on course for its third set of fees.
Amazon’s bid came a month after Scher, 52, a partner since 2006, was named to her current position alongside Pete Lyon. Before that, she ran investment-grade capital markets for the Americas and the risk-management group.
Combining M&A with deal financing attracted companies that would have snubbed Goldman Sachs a few years ago, John Waldron, co-head of investment banking, said in a Bloomberg Television interview.
“Management believes it can expand the footprint in acquisition finance without taking on much incremental risk,” wrote Glenn Schorr, an Evercore ISI analyst who met recently with Waldron.