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Goldman Turns Down Southern Europe Banks as Crisis Lingers

By Elisa Martinuzzi and Charles Penty
November 26, 2012 5:34 AM EST 20 Comments
Signage for Banco Popular Espanol SA hangs outside the bank's headquarters in Madrid, Spain.
Photographer: Angel Navarrete/Bloomberg
Signage for Banco Popular Espanol SA hangs outside the bank's headquarters in Madrid, Spain.

Goldman Sachs Group Inc. (GS), the No. 1 stock underwriter in Europe, turned down roles in offerings by banks in Spain and Italy this year, the only top U.S. securities firm not to take part in the fundraisings by southern European lenders as the region’s debt crisis stretches to a fourth year.

The firm declined a role in Banco Popular Espanol SA (POP)’s 2.5 billion-euro ($3.2 billion) rights offering this month because it wanted greater protection to avoid potential losses on the sale, two people familiar with the talks said. JPMorgan Chase & Co. (JPM) and Morgan Stanley are helping to guarantee the deal. Goldman also didn’t underwrite this year’s share sales by Italy’s UniCredit SpA and Portugal’s Banco Espirito Santo SA (BES), which drew Bank of America Corp. and Citigroup Inc.

Goldman Sachs, which got 55 percent of its revenue this year from sales and trading, is passing on underwriting fees that could be at risk should the stock drop, as happened with insurer Fondiaria-SAI SpA (FSA) this year. Goldman Sachs President and Chief Operating Officer Gary D. Cohn said a month ago that he sees only a “small” probability that the euro area will stick together, while the firm’s equity strategists are warning investors to be wary of companies that rely on southern Europe.

“Goldman can choose to be selective and make strategic choices about which deals they want to be in,” said Christopher Wheeler, a bank analyst at Mediobanca SpA in London and former equity capital markets banker. Its market position will allow the firm to return to those clients if it chooses, he said.

Capital Shortfall

Goldman Sachs, which held talks with Popular about managing the offering, had sought to underwrite it at a lower price to lure more investors and limit the risk to the sale managers, said a person with knowledge of the situation, who declined to be identified because the talks were private.

“Decisions around underwriting a particular transaction are always based on the circumstances specific to that situation, rather than a general view around markets, sectors or geographies,” Goldman Sachs said in an e-mailed statement. “We cannot comment on transactions where we didn’t play a role, but we remain committed to helping clients throughout Europe to raise capital, manage risk and grow their businesses.”

Officials at Madrid-based Popular declined to comment. Spain’s sixth-biggest lender is selling shares to cover a capital shortfall and avoid taking aid from the state. It’s offering shares at 40.1 euro cents, a 32 percent discount to the price on Nov. 9, the last trading day before the price was set, excluding the value of the rights.

The shares rose 0.7 percent to 55.4 cents at 11:30 a.m. in Madrid today. Investors can order stock through Nov. 28.

Rights Offers

Goldman Sachs has a 17 percent share of stock underwriting in Europe, excluding rights offerings such as the banking recapitalizations, data compiled by Bloomberg show. In rights offers, companies give existing investors the opportunity to buy stock first, typically at a discount to the market price. The offerings can last weeks as companies prepare prospectuses and give investors time to sell their rights or buy shares.

The U.S. bank also sought more in fees than Popular was prepared to pay, according to another person. Banks will earn a commission of 2.5 percent on the 2.1 billion euros of stock they have guaranteed, or about 52 million euros, the offering document shows. Popular may pay an additional 1 percent, or 21 million euros, at its own discretion.

Daragh Quinn and Duncan Farr, analysts at Nomura International, said the Popular offering may indeed be priced too high given the outlook for the troubled Spanish economy. Popular has said it expects to book a loss of 2.3 billion euros this year as it speeds up recognition of loan losses, and plans to generate earnings of 1.4 billion euros in 2014.

UniCredit Scare

“While this is a low valuation, we do not believe that it is attractive enough given our outlook for low returns,” the analysts wrote in a Nov. 12 report.

The Bloomberg Europe 500 Banks and Financial Services Index, which tracks 38 firms, has gained about 17 percent this year, though only nine of its members are valued at more than their book value. The more troubled banks have struggled to attract investors as bad loans grow and they buy more debt from their own sovereigns.

Goldman Sachs didn’t take part in the largest stock sale by a bank in the region this year, the 7.5 billion-euro rights offer by UniCredit (UCG) in January. That deal gave its underwriters a scare as the stock plunged 45 percent in the four days after the bank announced the sale, reaching a 23-year low. The price later recovered as the European Central Bank’s pledge to support banks with cheap money rekindled investor appetite.

Goldman Sachs was also absent from the 1 billion-euro offering from Espirito Santo, Portugal’s biggest bank by market value.

Fondiaria-Unipol

Five financial companies from southern Europe raised money from shareholders this year. Goldman Sachs wasn’t asked to participate in two of those because of perceived conflicts of interest by the client, said a person briefed on the talks.

The New York-based firm advised on the merger of Italian insurers Fondiaria-SAI and Unipol Gruppo Finanziario SpA (UNI), while seven other banks underwrote their offerings. Those firms, which included Credit Suisse Group AG (CSGN) and Deutsche Bank AG, initially found buyers for less than half of what they underwrote, leaving them at risk of losses.

The banks charged fees of at least 4.5 percent, providing the firms with 55 million euros to cover any trading losses.

“For much of the past year Goldman has adopted a fairly risk-averse stance, generally reducing trading value-at-risk, and comments from management have been cautious,” said Richard Staite, an analyst at Atlantic Equities LLP in London with a neutral rating on Goldman.

Cohn, Blankfein

The ECB’s pledge of unlimited support for debt-burdened nations in exchange for reforms hasn’t addressed the lack of growth that plagues the region, Cohn, 52, said in an interview in Tokyo last month. Goldman Sachs still sees opportunity in Europe to advise clients on purchases of bank assets, he said.

Chief Executive Officer Lloyd C. Blankfein echoed those remarks on Nov. 13 in a speech at a Bank of America Corp. conference in New York. He said growth “issues” are still holding back the region, according to a Bloomberg transcript of his remarks.

Goldman Sachs has still increased its overall bet on Spain. The firm’s potential losses from market price swings in the country rose to $800 million at the end of September from negative $271 million at the end of June, according to a filing with the Securities and Exchange Commission made public on Nov. 8. The equivalent figure for Italy was negative $1.4 billion, compared with negative $980 million in June.

Monte Paschi Loss

This year, Goldman Sachs has managed offerings of shares from non-financial companies in the region including Italy’s Luxottica SpA (LUX) and Snam SpA as well as Spain’s Amadeus IT Holding SA and Repsol SA, data compiled by Bloomberg show.

Today, Goldman Sachs is helping manage the sale of about 740 million pounds ($1.2 billion) of shares in Barclays Plc (BARC), Britain’s second-largest bank, as part of Qatar Holding LLC’s disposal of warrants in the lender.

In the past two years, the firm has increased the number of its client relationships in Europe by nearly 20 percent, according to Blankfein.

Goldman Sachs’s last share sale for a lender in the euro region’s so-called periphery was the July 2011 rights offer by Banca Monte dei Paschi di Siena SpA, Italy’s third-biggest bank, the data show.

The U.S. firm had lost money on a sale of Monte Paschi stock on behalf of its controlling shareholder in June 2011 after the shares plummeted, according to a person familiar with the transaction. The bank’s shares have since fallen by more than half amid a capital shortfall as the lender awaits its second bailout in three years.

“If it was all completely negative, people could adjust to that; all positive, could adjust to that,” Blankfein, 58, said of markets on Nov. 13. “I’m saying, uncertainty is the big killer because there is a substantial risk that things can go wrong, and that there’s a substantial risk that things could break to the high side.”

To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Charles Penty in Madrid at cpenty@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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