Structured products house of the year: Goldman Sachs

Asia Risk Awards 2020

Cedric Podevin
Cedric Podevin, Goldman Sachs
Photo: Edward Yu Photography

When an investment bank is striving to grow its business in Asia’s fiercely competitive retail structured products market, it helps to have the right technology in place.

Recognising this truth, Goldman Sachs last year launched a proprietary global cross-asset special-purpose vehicle (SPV) platform for clients, which it calls Luminis.

The launch of the new platform-led Asia structuring team, has allowed the bank to deliver and more efficiently manage its high-intensity repack business and, in the past 12 months, tap new customer segments such as high-net-worth and retail clients.

Goldman Sachs’ repack revenues this year show that Luminis has already been a staggering success. In 2019, revenues increased tenfold year on year. This year, the bank’s annualised revenues for repacks are predicted to grow a further three-fold year on year.

“Prior to 2019, we never had a platform centralised or durable enough to do this business in a scalable way,” says Cedric Podevin, head of structuring and strategy for Asia within the fixed-income currencies commodities team. “So what we wanted was to build a high-density, scalable platform. In 2018, we only did a couple of [repack] transactions, and this year we are looking at multiple hundreds of issuances.”

Repacks, SPV-issued notes, which combine a bond and a derivative and typically pay out floating coupons, have been a popular way for investors to generate extra yield in recent years.

The yield enhancement on the notes typically comes from specified payoffs linked to an asset class such as foreign exchange, rates, equity, credit or, sometimes, a combination.

According to Podevin, two key advantages Luminis has over competitor platforms is its global reach and its power to automate convoluted and lengthy issuance processes.

The big benefit of a global platform is cost. This differs from the approach of a number of other investment banks that have chosen to build their own regional platforms, says Pratik Turakhia, executive director in securitised structuring at Goldman Sachs.

“Our SPV platform is one of the lowest-cost platforms, in terms of both fixed and running costs,” he says.

Greater standardisation and automation, on the other hand, means Luminis has been able to reduce the time taken to issue repack notes from roughly five weeks to little more than a week. The shorter time to market has been key to the bank’s success in ramping up repack issuance.

“With repacks there are a lot of external parties involved,” says Turakhia. “But we’ve tried to standardise processes in such a way that we can now issue in 10 days instead of five weeks.”

The launch of Luminis also highlights some strategic foresight on the part of Goldman Sachs. It allowed for a more diversified product offering, which proved to be crucial at a time when its existing repack business was coming under pressure.

The bank had in place a platform for repacks before that, which Turakhia describes as “very bespoke” and focused largely on Goldman Sachs issuances. That model of focusing on Goldman Sachs issuances began to look less viable as funding costs edged higher.

“Management anticipated that we would need to diversify away from Goldman Sachs notes issuance and the platform is ready now,” says Ken Choi, head of rates structuring in Asia-Pacific ex-Japan. “Therefore we have a lot of revenues now that would not have been achievable before we brought [the platform] into existence.”

In addition to the development and launch of Luminis, there has also been a focus on enhancing product capabilities within the repack space.

The bank’s callable JGB repacks allow investors in the notes to shorten duration, but still receive an enhanced coupon generated by the sold call options. Japanese Agency Bond repacks were also traded, using the illiquid securities to offer investors an improved yield relative to JGB repacks. With hybrid repacks, Goldman Sachs was able to again improve the yield for one investor, by overlaying an Asian corporate-issued USD bond with two additional types of risk: USD rates curve risk and the credit risk of a financial institution.

Beyond the expansion of its repack business, Goldman Sachs has also shown why it remains a market leader in other types of structured product innovation, across multiple asset classes.

In rates products, for example, the bank was able to build up its market share through its ability to trade local-currency quanto versions of traditional US dollar and USD/TWD range accrual notes, as well as reverse convertible pay-offs.

By trading with more counterparties and on a broader range of reference entities, the bank also grew its credit-linked note (CLN) business, especially with its Japanese clients. A major contributor to that growth in the past year has been hybrid CLNs, a product that offers an enhanced return that is subject to the performance of market underlyings, in addition to the requisite credit risk.

On an annualised basis, overall CLN issuance increased by 150% between 2019 and 2020, driven largely by hybrid CLN issuance.

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