Goldman in Malaysia: know your client

 

(Financial Times) – So, your reputation has taken a battering in recent years and you’re now just about out of the spotlight. And, even if you’re not deeply loved, at least most people have got bored of calling you the Vampire Squid.

 

What do you? A: Try to ensure you do everything you can to keep your nose clean and stay away from controversy? Or B: Take on what looks like a highly lucrative private bond deal for a government-linked entity in Malaysia, barely a month ahead of what is expected to be the closest fought election since elections began in the late 1950s.

 

If you’re Goldman Sachs, the answer is… B! The question is: why?

 

Some in the bank might now be asking this after it attracted some sharp criticism from the political opposition in Malaysia over a $3bn bond deal it arranged for an entity called 1MDB at the end of March.

 

To recap briefly, the entity in question – a British Virgin Islands-registered, Malaysian government-controlled fund – raised capital by selling $3bn worth of unrated bonds to Goldman for just $2.71bn, or 90 cents on the dollar. The bonds eventually got a public rating from S&P, “A-”, the same as Malaysia’s government debt rating – leaving the bank with some heavily discounted bonds, significantly boosting their effective interest rate yield. Even before discounting, these bonds carry a coupon that yields a full 1 percentage point more than Malaysian sovereign bonds in the market.

 

The lower the yield you can resell at, the higher the price you’ll get for the bonds. You don’t have to be Bill Gross to see there’s more than a little bit of value there.

 

1MDB has already attracted its own controversy. It has faced questions over the fate of proceeds from its exit of an earlier joint venture with PetroSaudi International. Last week, the fund issued a statement slamming any allegations as baseless and politically motivated – read the statement here.

 

So, what attracted Goldman to this trade?