Goldman Sachs’ bond mandate from Vivendi Universal was packed with drama from start to finish. Brian Caplen meets the team behind the deal.If you think you’re a fully fledged investment banker, try executing this deal.

The credit is a fallen angel, a high profile casualty of the tech bust and a first timer in the high yield market. Everything the company does attracts media attention of the negative kind. The company is extraordinarily complex with 6000 subsidiaries dotted around the world and is engaged in a E16bn ($18.6bn) asset disposal programme. The tender document runs to 300 pages and had to be rushed out in a breathtaking three weeks.

Following this, the roadshow was held in 22 cities on both sides of the Atlantic in just seven days. During the roadshow, a legal action was launched against the credit. Being French, the credit also ran into the anti-French sentiments of US investors generated by the French government’s opposition to the Iraq war. The investment bankers handling the deal received angry calls from irate US investors questioning the rationale of bringing a French credit to market at this time.

War broke out four days before the bond deal was executed – making the market even more jittery – and, during pricing, several key high yield investors pulled out complaining the pricing was too tight.

Despite all these obstacles, Goldman Sachs successfully advised on a E3.7bn debt financing for Vivendi Universal, including bond offerings of E325m and $935m yielding 9.75% and 9.25% respectively. Lead arrangers on the loan were Citigroup, Goldman, Royal Bank of Scotland and SocGen.

Down the drain

The advent of the Iraq war was only one of many challenges faced by Goldman Sachs in the bond deal.

“We were nervous about the impact of anti-French sentiments on the deal,” says Philippe Altuzarra, managing director and co-head of Goldman Sachs in Paris. “As we were launching, French wine was being poured down American drains and French fries were renamed ‘liberty fries’.”

But in the end the Goldman team was proved right in believing that investors were economic creatures and would buy the deal if the story, the price and structure were right: the deal was six times oversubcribed and bought by a wide investor base, including banks, hedge funds, insurance companies, investment grade as well as high yield investors.

Strategies to choose from

Goldman looked at a number of funding strategies for Vivendi before deciding on the bank loan/high yield combination. The aim was to term out Vivendi’s debt so that it would not be forced into a disposal of assets at fire sale prices.

Goldman has long had a close relationship with Vivendi and advised the company in 2002 when it successfully battled Vodafone to retain control of Cegetel – the owner of French mobile operator SFR. Crucial in clinching the financing mandate, however, was Goldman’s decision – bold for an investment bank – to lend its own money as part of the financing. Goldman’s credit committee looked favourably on Vivendi even though in early 2002 the bank’s earnings fell 32%, in part due to a big loss on a block trade of Vivendi stock.

Goldman’s relationship with Vivendi gave it unrivalled knowledge of the firm and enabled the bankers and the company to draw up a highly detailed offering document in record time. “Vivendi was keen to move quickly against the market uncertainty, but going into detail was also essential as this was the first time Vivendi had given, in a public document, a complete picture of the previous year’s events,” says Eric Coutts, a Goldman managing director in the investment banking division. Equity analysts had earlier complained about a lack of clarity and that their questions were not being answered. The document has been likened to an initial public offering prospectus for the new Vivendi.

Mr Altuzarra says of the debt roadshow: “They were going to present a company that had experienced problems but now had a new management team and strategy. There was a lot of explaining to do.” Vivendi’s new CEO Jean-Rene Fourtou, chief operating officer Jean-Bernard Levy, chief financial officer Jacques Espinasse and senior executive vice-president for divestiture Robert de Metz were among senior executives who went out on the roadshow to face investors.

“It was a challenging roadshow because of the negative news flow and the unusual nature of the story. We had some institutions that were so negative they bet against the deal with shorts that sent credit spreads wider,” says Tim Flynn, Goldman’s executive director.

Pricing problems

The bad news flow included Liberty Media’s filing of a lawsuit against Vivendi claiming it was deceived about the scale of the French group’s financial problems during a share swap transaction dating back to 2001. “The order book was already building slowly and the Liberty action took even more wind out of its sails,” says Mr Flynn.

On top of that, there were ongoing or recent investigations by the Securities and Exchange Commission, the Office of the US Attorney for the Southern District of New York and the French stock exchange regulator, Comission des Operations de Bourse (COB); the US-France arguments over Iraq; and finally the war itself.

Then a group of major high yield investors pulled orders worth $500m because they were unhappy about the pricing. They had expected a double-digit coupon.

“These were big buy-and-hold high yield investors and it was difficult losing their orders. Fortunately, we had driven the distribution through our investment grade investor base as well as the traditional high yield investor base, otherwise losing those orders could have been damaging,” says Mr Flynn.

In the end though it all came right with a massive oversubscription and pricing at the tight end of guidance.

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