Goldman, Leverage & Dealmaking

Leverage. It’s at the heart of the banking system. It’s the root of how hedge funds work and how highflying deals get done. It’s the art of borrowing money and trying to make more money on top of those borrowings.

Leveraged finance, more specifically, is the industry term for extending money to riskier corporations and private equity buyouts. It’s been slow to rebound since last year’s market rout and March’s regional banking crisis. But if you ask a Goldman Sachs banker, this risky business is showing promise despite all the market’s worry.

Goldman’s leveraged finance conference, which was run by David Solomon himself in the late 1990s in the run up to the dot-com bubble, surfaced some green shoots. “The activity levels are really picking up,” said Christina Minnis, Goldman’s co-head of global credit finance. Many of the 400-plus investors in California for the event, she said, “would like to learn how to put money to work in a challenging environment.”

Minnis looks at private equity dealmaking as one indicator. “The average number of take privates over a five-year period, I think it’s been 64 deals, we’re already over 100 in 2023. So that just tells you something, right there,” she said in a television interview on the sidelines of the event . “When do I see the mega-transactions coming back? Those will take more time.”

Another area to watch is companies that have to refinance their debt loads. There’s more than $70 billion of high-yield bonds and loans coming due through the end of 2024, according to Jordan McCallum, who works on Minnis’s team on restructurings, citing Pitchbook and S&P data. In a higher interest rate world it could be harder for these companies to find new money.

You’d think that a fair number of those companies will end up going bankrupt; they just have so much debt and, in a number of cases, are unprofitable. But “not all will end in messy restructurings,” McCallum said. Some lenders will work through borrowing terms, “and others will have success with opportunistic investors that can bring creative financing solutions to the table.” (Call that a nod at all the private credit mounting on the sidelines.)

Even in equity markets, which can carry more risk than debt markets, there are deals building under the surface. A senior equity capital markets banker at Goldman, Lizzie Reed, said there’s “ample demand” for the right companies looking to go public. “The IPO pipeline continues to build and global backlog is multiple times larger than this time in 2019,” she said.

Hedge Fund Trades

Here’s an area where leverage is drawing some scrutiny. A popular move in the hedge fund world is the “basis trade,” which can be highly levered in Treasury markets. The trades in some cases are levered 50-to-1. As Securities and Exchange Commission Chair Gary Gensler told Bloomberg: “There’s a risk in our capital markets today about the availability of relatively low margin—or even zero margin—funding to large, macro hedge funds.”

Financial watchdogs are questioning banks about the levered trading in government bonds, especially because this trade has unwound before back in 2020 when the Federal Reserve was forced to intervene to backstop markets. The government brinkmanship around the debt ceiling has exacerbated regulators’ concerns. If US Treasuries are downgraded, you start to have real worries about the collateral underpinning the borrowings that facilitate these trades. Maybe we never get to that point. But it’s an indication that even the world’s “safest” markets have fragile spots.

Read our full story here: Infamous Hedge-Fund Trade Draws Fresh Scrutiny as Debt Battle Rages On

The New Boutique

Elsewhere in investment banking, we broke the news on Monday that Mizuho is buying Greenhill , the firm founded by Bob Greenhill that went public in 2004 and inspired an array of banks follow suit. Mizuho’s Jerry Rizzieri spoke to me on Bloomberg Television about the merger making the bank more competitive globally in M&A. “We’re not small by any stretch but in M&A we were subscale,” he said.

Over at Lazard, which tapped Peter Orszag as its next CEO starting Oct. 1 , there could be even more change ahead. In a memo to staff, he laid out three big priorities: strengthening the asset manager (potentially through acquisitions), advancing the advisory business and attracting top talent.

In a telephone interview, Orszag expanded on his plans. “Like any new leader, it seems appropriate to take a fresh look,” he said. “That doesn’t necessarily mean there will be dramatic changes, but it does mean there will be a fresh look.”

More to come. On Tuesday after the long weekend, we have an exclusive interview with Ray McGuire (Lazard's new president) in the 10:00 a.m. hour, New York time. Wednesday, we'll be speaking with Mike Rockefeller, previously at Citadel and Millennium and now the co-CIO of Woodline Partners, one of the biggest hedge fund launches in recent years. Have a restful weekend in the meantime. Remember, you can always find this newsletter online on Fridays for Bw Daily, which you can sign up for here . And tips, opinions and ideas are always welcome at [email protected] .