A pen and a calculator.

Goldman's Debt Origination Contends with EU Crisis, Supported by US Corporates

Goldman Sachs' (NYSE:GS) equity underwriting and debt origination business competes against major investment banks like Bank of America ( BAC ), Citigroup ( C ), Morgan Stanley (NYSE:MS) and Deutsche Bank ( DB ) to provide equity and debt underwriting services for securities issues globally. Goldman Sachs provides debt underwriting for corporate debt, government agency debt, sovereign debt as well as asset backed securitization services. The global debt origination volume in 2010 was estimated around $5.5 trillion and Goldman Sachs served approximately 4.5% of this market to generate $1.6 Billion in revenues.

Impact of the Sovereign Debt Crisis

The sovereign debt crisis in the Euro zone and the lingering uncertainty over the repercussions of the debate on reducing the Federal deficit in the United States have the potential to impact the global debt origination market that account for approximately 43% of the revenues of the equity underwriting and debt origination segment of Goldman Sachs. We estimate the division contributes just under 8% of the Trefis price estimate of the company.

The deteriorating credit worthiness of debt laden countries such as Ireland and Greece and stricter regulations over sovereign borrowing can potentially shrink the overall size of new debt issues by nations coming under the EU. The S&P sovereign issuance survey estimates that European government borrowing may decline by 15% in 2011 from its peak level of €1,414 billion last year. In the long-term the report expects Government debt levels (not to be confused with new debt issued) in the region to increase to €8.4 trillion by 2013 before stabilizing. Another trend highlighted in the report is that 63% of the borrowing in 2011 would be to refinance maturing debt, up from 48% in 2010 indicating the significant efforts by governments to tighten their fiscal spending.

Corporate Bond Issuance

On the other hand, booming sales in the corporate bond market indicate that companies are taking advantage of low interest rates to raise more debt, perhaps in anticipation of higher rates in the future. The exuberance to benefit from the low yields on corporate bonds is highlighted by the number of companies that have taken to generating cash through this channel to finance stock repurchases and M&A.

For example, Google (NASDAQ:GOOG) raised $3 billion through a bond sale this May, despite sitting on around $36 Billion in reserves as of March 2011. Other companies that have tapped into the debt market over the past few weeks include Johnson & Johnson (NYSE:JNJ), Chrysler, Blackrock ( BLK ) and Philip Morris (NYSE:PM).

Bond sales are also being stimulated by the lingering uncertainty over increasing interest rates after the Federal Reserve ends its Treasury purchase program in June this year. As companies race to maximize their benefit from the current scenario, debt origination volumes will improve on the back of new corporate issues.

We expect the overall debt origination volume to increase to $5.9 trillion in 2011 and eventually grow to $8.3 trillion in the coming years.

See our full analysis for Goldman Sachs

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics

Investing Stocks US Markets

Latest Markets Videos


    Trefis is an interactive financial community structured around trends, forecasts and insights related to some of the most popular stocks in the US. Whereas most finance sites simply give you the facts about where a stock has been and what a company has done in the past, Trefis focuses entirely on the future.

    Learn More