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09 Aug 2002
MOODY'S UPGRADES GOLDMAN SACHS TO Aa3.
Approximately $34.5 Billion of Long-Term Debt Securities Affected.
New York, August 09, 2002 -- Moody's Investors Service upgraded the senior unsecured debt ratings of
The Goldman Sachs Group, Inc. from A1 to Aa3. This
action completes a review commenced on May 22, 2002.
In its explanation of the upgrade, Moody's said that Goldman Sachs
has excellent and defendable franchises in mergers and acquisitions,
primary and secondary equities, and prime brokerage. According
to the rating agency, these businesses have good long-term
secular prospects and Goldman's position and market share in these businesses
is very sound. Since going public in 1999, Goldman has successfully
expanded these businesses organically, and also by acquisition.
Goldman Sachs continues to generate good profits during this cyclical
downturn. Despite merchant banking write-downs, and
weak conditions in M&A and equity underwriting, the firm produced
$1.7 billion in pre-tax earnings and a 23%
pre-tax margin in 1H02. Goldman's growing securities services
and asset management businesses have provided some cushion to overall
results as capital markets have weakened. The company is also controlling
expenses well through this downturn. Moody's expects Goldman's
financial performance to improve when activity levels in its M&A and
equity underwrting businesses recover.
Goldman Sachs has maintained excellent discipline and controls around
the market, liquidity, and credit risks that the firm assumes,
the rating agency said. The firm's trading operations have been
solidly profitable since management exited certain proprietary fixed-income
arbitrage strategies in the fall of 1998.
Although Goldman sometimes takes large positions for proprietary reasons
or to provide liquidity to clients, its trading revenues are diversified,
and the firm manages trading risk comprehensively. Management relies
on value-at-risk and stress-testing approaches,
and mark-to-market discipline, as well as experience
and judgment. Also, Goldman typically eschews general-purpose
wholesale lending and emerging market risk, a significant consideration
for the rating upgrade. Large losses on individual trades will
occasionally occur, but Moody's expects the firm to continue to
be profitable from quarter to quarter.
Goldman Sachs has very strong liquidity. Since going public,
Goldman has sharply increased its permanent tangible common equity,
which now stands at $14B. The equity base has been supplemented
with long-term debt. Growth of illiquid assets has been
restrained, Moody's said, and thus the long-term capital
surplus has increased sharply. Goldman Sachs uses short-term
unsecured financing judiciously. Unsecured debt finances a pool
of highly liquid securities to meet potential liquidity needs, eliminating
the need to rely on bank financing.
Goldman Sachs is currently involved in civil litigation that arise out
of the normal course of its business, and litigation against securities
firms has recently increased. Based on the current situation,
Moody's thinks the firm has sufficient earnings power and resources to
deal with the legal issues that it faces. So far Goldman has avoided
most of the high-profile problems that have affected some other
financial institutions following the collapse of the technology bubble
and the Enron debacle.
Moody's will continue to monitor the financial position of the holding
company, the company's exposure to civil litigation, and any
changes in less liquid positions such as loans and speculative grade bonds.
The following ratings were upgraded:
The Goldman Sachs Group, Inc. - senior unsecured debt
and MTNs from A1 to Aa3; long-term issuer rating from A1 to
Aa3; senior unsecured shelf from (P)A1 to (P)Aa3; subordinate
shelf from (P)A2 to (P)A1; preferred shelf from (P)A3 to (P)A2.
Spear Leeds & Kellogg L.P. - backed senior unsecured
debt from A1 to Aa3.
Goldman Sachs Overseas Finance, L.P. - backed
senior unsecured debt from A1 to Aa3.
The following Prime-1 ratings were confirmed:
Goldman Sachs & Co
Goldman Sachs Canada Finance Co.
Goldman Sachs Japan Ltd.
Goldman Sachs is an international investment bank, with total capital
of $53.4 billion at May 31, 2002.
Financial Institutions Group
Moody's Investors Service
Peter E. Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service
No Related Data.
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