BB+ Brazil vs. AA- Goldman Sachs
It wasn’t that long ago that Brazil was a fiscal basketcase. But today, the global credit markets are telling us that it’s a better credit than Goldman Sachs (GS:NYSE).
As of yesterday morning, Goldman’s 2037 6.75% bonds were trading at 85.441, implying a yield of 7.9%. Brazil’s 2037 7.125% 2037 bonds have rallied to 107.19 – generating a yield of 6.647%.
When these two bonds were issued, Goldman’s A+ rated subordinated bonds commanded a rate that was 37.5bps lower than the nation of Brazil. In less than a year, Goldman’s 30 year bonds have backed up 130bps, and are now paying a 340bps premium vs. the 30 year U.S. government bond.
With Goldman sporting a market cap of US$61 billion (down 40% from last year’s high), and shareholders equity of US$42.8 billion (as of 11/07), those A plus-rated 7.9% yielding bonds seem to have plenty of cushion under them. (Goldman’s long term debt is AA- rated, a notch above the sub notes).
Brazil has performed incredibly well since 2005, when it owed the world US$400 billion. Today, it is a net creditor, and expecting to be upgraded to “investment grade” later this year, according to Merrill Lynch.
AA minus bonds are yielding higher than BB+.
Is there a disconnect here? It appears that markets have become so distrusting of the rating agencies that investors will even doubt the credit rating of Goldman itself.
Hat tip to TS
(disclosure – I own GS)