Goldman, Sachs & Co. borrowed a page from its corporate finance book when it priced $1.24 billion of its own tax-exempt Liberty bonds yesterday in a transaction structured differently from a traditional municipal bond issue.
Goldman offered just one maturity yesterday in a deal that will help finance the firms new headquarters in Lower Manhattan. The bonds maturing in 2035 were priced at a spread of one basis point over the longest on-the-run Treasury bond, which yielded 4.58% at pricing.
During a special order period Monday, the firm priced $22.8 million of bonds maturing in 2015 for retail investors.
Along with the limited maturities, a make-whole call provision was one feature that distinguished this issue from a typical muni sale. Under the provision, also known as a yield-maintenance call, the bonds are callable at any time at a price equal to the greater of: the amortized value of the bonds or the price of the bonds based upon a yield equal to Municipal Market Datas triple-A scale for their respective maturities minus 25 basis points.
Goldman Sachs inserted the call provision, which is commonly seen in corporate issues, to gain flexibility in managing its worldwide investments, not designed to save the firm money when interest rates go down, said a Goldman banker close to the deal. Some fund managers said they had never seen such a call provision before on a tax-exempt issue.
A lot of people other than traditional municipal buyers are taking a look at this deal, said Paul Brennan, a vice president and portfolio manager at Nuveen Investments in Chicago, who said he was unable to comment on whether he participated in the sale.
Brennan noted interest in the sale from funds looking to buy longer securities, such as pension funds, and also from those who normally buy taxable paper.
Bond proceeds will help finance a new $2.4 billion headquarters building for Goldman across a six-lane highway from the World Trade Center site. The 800-foot, 40-story building will include 1.9 million square feet of office space and will consolidate into one space most of the firms roughly 8,100 New York employees, currently divided among eight downtown locations.
Bonds sold for the headquarters will not be backed by any lien, mortgage, or other security interest in the headquarters building, however. Instead, loan payments received from the borrower, Goldman Sachs Headquarters LLC, will secure the bonds, along with payments received from the Goldman Sachs Group Inc., parent company of both the borrower and the broker-dealer.
In effect, the bond is a general obligation of Goldmans, one fund manager noted. This could be attractive to investors who view the company as a strong credit, while others may prefer the security of an option on a valuable Lower Manhattan property, he said. Goldman does not often appear in the market as a tax-exempt credit, so these bonds could also help diversify portfolios already saturated with water, housing, or other municipal credits, the fund manager said.
Fitch Ratings rates Goldman Sachs Groups senior unsecured debt AA-minus. Moodys Investors Service rates it Aa3. Standard & Poors rates it A-plus.
The general backing on these bonds sets them apart from the usual municipal revenue bonds backed by project fees. A $475 million Liberty bond sale last spring for 7 World Trade Center was structured so that in the event of default, the bondholders trustee could take over management of the 52-story tower, which is the first of the buildings that fell on Sept. 11, 2001, to be rebuilt.
