Explain this quote about Goldman Sachs from the WSJ please?

please explain what this means. It's from the Wall Street Journal. The title is "Can Goldman Win on Debt? Using Loans to Good Credit in New Investment Vehicles May Pay Off for Investors"

here's the quote:

"Say Goldman has committed to underwrite $1.2 billion of loans backing ABC's leveraged buyout. It has effectively promised its client $1.2 billion, no matter what it sells the loans for. If it can only find buyers at 85 cents on the dollar, a 15% discount then Goldman has lost 180 million on the deal.

Assume Goldman believes ABC is a good credit unfairly battered by the credit crunch. The firm could set up an off-balance sheet fund, capitalizing it with 20% equity and raising the rest from outside lender, to buy ABC's loans at the same 85 cents on the dollar.

To entice those lenders, the fund could offer a couple of percentage points more in interest than it receives ABC loans."

thanks,

1 Answer

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  • 1 decade ago
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    Since the loans are valued below par, there are two ways to raise it. Either agree to take on extra debt which causes the immediate loss. Or they can increase the interest rate and put in their own funds. In case 1 the loss is locked in and improvement in the value of the loans does not help Goldman Sachs. However in the second case, Goldman Sachs can resell the loans if the value improves and reduce or eliminate the loss. However there also is a possibility that they could lose more if ABC has trouble paying back the loan.

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