Goldman Sachs will on Wednesday start marketing a new structured secured bond that draws on covered bond features and which the bank hopes will provide it with cheaper funding, being backed by a range of fixed income assets and two guarantors.

Goldman has set up a Eu10bn programme for the issuance of “fixed income global structured covered obligations” (FIGSCO) by FIGSCO Issuer Ltd, and is embarking on a one week European roadshow to explore investor appetite and hence the prospects of doing a deal at levels that would make economic sense. Barclays, Crédit Agricole, Natixis and UBS are on the roadshow mandate alongside Goldman Sachs.

The move to establish the programme, which is expected to be rated triple-A by Standard & Poor’s, is aimed at taking advantage of a demand overhang for triple-A supply, with the investment bank seeking to position the FIGSCO bonds as a rates product and obtain cheaper funding than that available to it in the senior unsecured market.

The FIGSCO bonds are not being marketed as covered bonds but are being described in relation to the asset class – where there are similarities and where there are differences, either as a relative strength or weakness – and Goldman is understood to be intent on positioning the FIGSCO structure closer to covered bonds than any other funding tool on the credit-rates spectrum.

Bonds issued by FIGSCO would be backed not by mortgages or public sector assets, as is typically the case in covered bonds, but by long dated fixed income assets held by Goldman, which can include senior unsecured debt, consumer ABS, and RMBS, for example.

Investors in FIGSCO bonds would benefit from what has been called “triple recourse” in the event of an issuer default: recourse to the assets, and then if there is any shortfall a claim on, first Goldman Sachs and then Mitsui Sumitomo Insurance (Mitsui), which act as “credit support providers”. The claim on Goldman and Mitsui is via Goldman Sachs Mitsui Marine Derivative Products (GSMMDP), a long-established joint venture between Goldman and Mitsui.

GSMMDP is rated Aa2 by Moody’s and AAA by Standard & Poor’s. According to Moody’s, it was established to act as an intermediary in over-the-counter derivatives and is jointly and severally guaranteed by Goldman and Mitsui. Goldman is rated Baa1 by Moody’s and Mitsui A1, but Moody’s believes that a jointly supported obligation can be rated higher than either support provider because the likelihood of a joint default is typically less than the probability of default of either support provider individually.

For GSMMDP to default, Goldman Sachs and Mitsui would have to both default, with each exposed to arguably quite different risks given one being a US investment bank and the other a Japanese insurance company. FIGSCO payments are guaranteed via a total return swap (TRS), a mechanism to deliver the assets to FIGSCO by GSMMDP.

The expected triple-A rating of the FIGSCO bonds will be on the basis of GSMMDP’s standalone rating and not on the basis of any notching up to take account of the assets in the pool – although this would appear to be a moot point in FIGSCO’s case given GSMMDP’s triple-A rating from S&P.

To make economic sense, any deal would have to come inside the senior unsecured levels, actual or assumed, of Goldman Sachs and Mitsui Sumitomo Insurance – “the ultimate port of call” for investors in the event of an issuer default – according to the banker familiar with the FIGSCO structure

Mitsui CDS levels are considerably tighter than Goldman’s and the banker said that the relationship would be similar for senior unsecured debt if Mitsui were to have a non-domestic currency unsecured curve, although it does not. Mitsui five year CDS were at 29bp and Goldman’s at 79bp today (Monday). Goldman would pay around 80bp over mid-swaps for new five year senior unsecured debt, 90bp over in seven years, and 105bp-110bp over in 10 years, said the banker.

The banker acknowledged that FIGSCO issuance would probably not achieve the same spread savings versus senior unsecured funding that the average triple-A covered bond would deliver for an issuer, given that most covered bonds are backed by legislation and the product is well-established.

“But clearly it needs to make economic sense,” he said. “There’s no point giving something that’s close to senior unsecured levels.”

Goldman is understood to be targeting a deal in euros partly to avoid cannibalising its senior unsecured investors, which are predominantly in US dollars.

The assets in the cover pool will be from across the world, The CBR understands, which will reduce concentration risk and means that, among other consequences, in contrast to a traditional mortgage covered bond, the ultimate guarantor or sponsor of the bond is not also the servicer of the asset, which is a positive from a probability of default correlation perspective.

An external asset monitor would on a monthly basis check the valuation of the cover assets, which will be marked-to-market on a daily basis on the bid-side in a bid to ensure that the cover pool would be easy to liquidate if necessary. A minimum of 5% overcollateralisation is understood to have been set and will be assessed on the market value of the cover pool, which will be topped up on a daily basis if necessary. Further overcollateralisation will be required based on the ratings of securities in the pool. There will be quarterly reporting on the cover pool.

A pre-sale report is expected to be available in time for the start of the roadshow along with an offering circular.

FIGSCO bonds will not carry key regulatory benefits associated with traditional covered bonds. They will not count towards banks’ Liquidity Coverage Ratio (LCR) requirements and will come with a 20% risk weighting.