Goldman, Blackstone partner for new type of bond

by Immanual John Milton, Scott Carpenter and Carmen Arroyo

Goldman Sachs Group Inc. has teamed up with Blackstone Inc. to package private fund loans into bonds, a novel form of debt that banks could look to sell more of in the future.   

The pair last week sold $475 million in bonds backed by loans that banks make to investment funds, according to a person with knowledge of the matter. These loans exist because private equity and other investment vehicles raise money in the form of commitments from investors to hand over cash when the fund demands it. Loans can help the funds delay asking for liquidity from their investors, which can boost fund return metrics. 

Goldman Sachs made a group of these loans and packaged them into asset-backed securities. Blackstone bought the riskiest part of the deal, said the person, who asked not to be identified discussing a private transaction.

This securitization creates a bridge between the fund finance world and the public asset-backed securities market, a link that’s expected to strengthen. Goldman’s Adam Zotkow, head of US fund finance, said capital call securitizations will provide one new method for the bank to make more of these loans. He expects the bank to occasionally tap this source of funds in the future.

“We have opened up a new asset class with low historical losses to asset managers and insurance companies,” Zotkow said.

While capital call receivables have never been packaged into broadly sold asset-backed securities until now, the asset class has had low credit risk, according to Stuart Rothenberg, a senior vice president at Morningstar DBRS, which rated the top tranche AAA.

The pool of capital call lines in the deal tie back to several thousand limited partners, the largest of which include Singapore’s sovereign wealth fund and the Abu Dhabi Investment Authority, according to investor materials seen by Bloomberg.

Singapore’s sovereign wealth fund and the Abu Dhabi Investment Authority didn’t immediately reply to requests for comment. 

As part of the deal, Blackstone is injecting equity in exchange for a share of cash flows thrown off by the underlying investor commitments, according to the person with knowledge. Blackstone declined to comment.

The deal comes as banks are increasingly partnering with private sector lenders to share their balance sheets while preserving relationships with borrowers. One popular technique, known as synthetic risk transfers, ballooned in popularity over the last year as banks sought ways to reduce their risk capital exposure under Basel III Endgame rules. Several such deals have focused explicitly on capital call lines to funds, including a $2 billion deal in July by Goldman Sachs.

Lending against capital call lines is a roughly $900 billion market, law firm Cadwalader estimated earlier this year. That market was disrupted last year after the collapse or takeovers of regional lenders Silicon Valley Bank, First Republic and Signature Bank, all of which were active as lenders. Goldman is among the large banks that picked up some of those smaller lenders’ subscription lending assets in the wake of the upheaval.

“The subscription line business has been a key focus for us,” Zotkow said. The deal “enables us to scale lending while partnering with investors looking to access this growing segment of the fund finance market.”

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