Goldman Sachs Structured Notes Surge After JPMorgan Sale

Goldman Sachs Group Inc. was this year’s top seller of U.S. structured notes through February for the first time since at least 2010 and is on pace to more than double last year’s volume, helped by demand from other big banks.

Issuance by the New York-based lender totaled $1.48 billion, up 40 percent from January and February of 2014, according to data compiled by Bloomberg based on filings with the Securities and Exchange Commission.

Goldman’s top ranking has been boosted by sales of notes arranged by other banks, where their money-management units have embraced so-called open architecture that offers products from a range of issuers. This year, 40 percent of Goldman sales have been underwritten by other banks, up from 24 percent during the same period last year, Bloomberg data show.

Open architecture “continues to evolve and is now much more robust,” said Glenn Lotenberg, managing director of structured product sales at Incapital LLC in Boca Raton, Florida. “You’ll see most private banks and broker dealers are open architecture for diversification of credit.”

The bank sold $497.5 million of structured notes on Jan. 30 that were distributed by JPMorgan Chase & Co. for a 1.1 percent fee. The offering was Goldman’s largest since at least 2010, Bloomberg data show.

Goldman’s 12-month notes are tied to a basket of three indexes, including the Euro Stoxx 50, FTSE 100 Index, and Topix. Investors receive twice the gains of each index that rises, subject to a cap of 21 percent on their individual returns, with proportionate losses if the index falls, according to a prospectus filed with the SEC.

Popular Notes

Like the broader market, Goldman’s equity-linked notes were the most popular in the first two months of the year, making up 92 percent of the bank’s sales. Rate-linked notes totaled 6 percent of its sales.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

Bank of America Corp. remained the top underwriter of U.S. structured notes during the first two months of the year, leading the way for at least the sixth year in a row.

Goldman sold $4 billion of structured notes in 2014, Bloomberg data show, a 4 percent rise from the prior year, but less than was issued in 2010 through 2012. The highest amount sold was $4.93 billion in 2011. Banks sold a total of $41.6 billion in structured notes last year.

Better Terms

The cost to protect Goldman’s debt from default within 5 years fell to 85.5 basis points on Wednesday, according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. That’s the highest credit-default swap level among the top 10 structured notes sellers in the U.S. Banks with higher perceived credit risk, as measured by default swaps, sometimes offer better terms on their notes. A basis point is 0.01 percentage point.

Banks began adopting open architecture around the middle of the last decade, and it gained popularity after the financial crisis as a means of diversifying credit risk and putting banks into competition with each other to provide the most attractive products.

Tiffany Galvin, a spokeswoman for Goldman Sachs, declined to comment on the firm’s structured-note sales.

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