Goldman Sachs is planning €10B in sales of a controversial new type of bond that utilizes total return swaps, at the same time the derivatives are gaining popularity in the market due to the historic lows of credit investments.
TRS, Total return swap, is type of credit derivative that allows investors to get the exposure to portfolio of bonds, loans etc. without actually owning these assets. Investors pay the fees to the return payer to get the total rate of return on desired portfolio, without owning it. The investor, receiver of the TRS, must pay any decline in price to the TRS payer. If there is no decline in price than investor does not need to make a payment. If price gets appreciate than investor gets the appreciated amount from the return payer. It is like investors does not own the referenced portfolio laegally but return profile will be same as like investor owns the asset.
TRS is not new product and it has been around at least since 1987 when Salomon Brothers offered the first mortgage swap agreement (“MSA”).
“They can be used as a mechanism to get short or get long – you can go long something that you can’t necessarily buy in the marketplace or go short something that’s difficult to short.”
TRS are off balance sheet transactions and investors,normally hedge funds, use it for leverage.
TRS are used as a mechanism to get the benefit of funding arbitrage. Low cost borrowers with large global balance sheets are naturally advantaged as payers in TRS. Synthetic assets are created in the process. Higher cost borrowers, such as hedge funds, enjoy the financing and leverage of the total return transaction. The total return payer pays the total return of a reference security and receives a form of payment from the receiver of the total rate of return. Often payment is a floating rate payment, a spread to LIBOR.
The Goldman deal, which the bank is calling a “covered obligation,” uses a TRS provided by a joint venture between the bank and Mitsui Sumitomo Insurance on a changeable portfolio of fixed income assets. Investors also have recourse to Goldman and Sumitomo in a feature typically found in covered bonds. S&P already gave the bond knows as FIGSCO(Fixed Income Global Structured Covered Obligation) a AAA rating, but Fitch warns that the deal’s "structural protections and collateralization levels are too low to enjoy such a designation.
With this new Bond offering Goldman is trying solve the inventory financing problem.The deal effectively allows Goldman to source financing for a whole slew of assets all at once, rather than strike individual bilateral deals.
TRS, Total return swap, is type of credit derivative that allows investors to get the exposure to portfolio of bonds, loans etc. without actually owning these assets. Investors pay the fees to the return payer to get the total rate of return on desired portfolio, without owning it. The investor, receiver of the TRS, must pay any decline in price to the TRS payer. If there is no decline in price than investor does not need to make a payment. If price gets appreciate than investor gets the appreciated amount from the return payer. It is like investors does not own the referenced portfolio laegally but return profile will be same as like investor owns the asset.
TRS is not new product and it has been around at least since 1987 when Salomon Brothers offered the first mortgage swap agreement (“MSA”).
“They can be used as a mechanism to get short or get long – you can go long something that you can’t necessarily buy in the marketplace or go short something that’s difficult to short.”
TRS are off balance sheet transactions and investors,normally hedge funds, use it for leverage.
TRS are used as a mechanism to get the benefit of funding arbitrage. Low cost borrowers with large global balance sheets are naturally advantaged as payers in TRS. Synthetic assets are created in the process. Higher cost borrowers, such as hedge funds, enjoy the financing and leverage of the total return transaction. The total return payer pays the total return of a reference security and receives a form of payment from the receiver of the total rate of return. Often payment is a floating rate payment, a spread to LIBOR.
With this new Bond offering Goldman is trying solve the inventory financing problem.The deal effectively allows Goldman to source financing for a whole slew of assets all at once, rather than strike individual bilateral deals.
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