Skip This Week’s Treasury Auction For Goldman Sachs’ 7% Yielding Debt (NYSE:GS)

As the investment community continues to digest the massive selloff in Treasuries, I have been busy seeking opportunities with rising yields within the investment-grade corporate debt markets. This week, I discovered that Goldman Sachs (NYSE:GS) is offering a 10-year note with a 7% coupon. Interest on the note is paid semi-annually, and after reviewing the company’s third-quarter earnings, I believe the note is attractive for income investors.

Goldman’s 10-year note offer currently sits about 140 basis points higher than the highest-yielding US Treasury and 120 basis points higher than the highest-yielding certificates of deposit being offered by banks. Within the corporate debt market, Goldman’s 10-year note is yielding 33 basis points higher than the average BBB corporate note and 78 basis points higher than the average A rated corporate note. Goldman is rated BBB+ by S&P and A2 by Moody’s.

Goldman Sachs’ third quarter earnings were rather resilient considering the backdrop of the financial markets in the face of higher interest rates. The company’s net revenues related to equity investments were nearly $1 billion lower than the same quarter a year ago, but total net revenue for the quarter was only $150 million lower. This was due to strength in the investment bank’s global banking division, which grew net revenues by over $400 million compared to the third quarter of 2022.

Zooming out to the entire income statement shows that Goldman Sachs had some cost challenges in the third quarter. Compared to the same quarter a year ago, Goldman’s expenses increased by $1.3 billion, although $850 million of that was noncash related depreciation and amortization. Overall, net earnings came in at $2 billion for the third quarter versus $3 billion for the same period last year.

From a balance sheet standpoint, Goldman Sachs is leveraged at 13.5 to 1, which is a little higher than a conventional bank, but more typical for an investment bank. The company has $240 billion of cash on hand, which is more than sufficient to cover the $70 million in short-term borrowings (should the debt markets become difficult). Goldman has also managed to grow deposits at a time when the commercial banking sector is seeing deposit decline.

Goldman Sachs also manages more than $2.5 trillion of its clients’ money. While the balance of assets under management declined in the third quarter, it was due to declines in the equity markets and not from client withdrawal. The trust that clients have in Goldman Sachs with their money demonstrates that revenues associated with the management of those assets should remain stable.

One concern that investors may have regarding Goldman Sachs is the exposure of its loans to commercial real estate (CRE). The company disclosed in the third quarter that CRE accounts for $25 billion of its loan portfolio, with the largest component being warehouse and only $2 billion being in the office space, which is currently the most scrutinized.

Goldman Sachs is not only highly unlikely to be unable to meet its debt obligations, it is taking steps to be conservative with its capital. As the Basel III regulations continue to be debated with great uncertainty, Goldman Sachs is moving carefully regarding how it deploys capital, and this is good for bondholders who simply want companies to be able to make their coupon payments.

Goldman Sachs’ 7% bond is not for everyone. The bond is callable at par after just one year and will be callable every three months after that until 2033. Should a drop in interest rates occur, investors may find themselves getting their principal back sooner than anticipated, which makes the bond potentially unsuitable for retirees or those seeking a longer guaranteed duration of income. Investors should weigh the bond’s call risk seriously prior to making an investment.

I’ve decided to make an offer on Goldman Sachs’ 7% bond maturing in 2033 because I like the coupon being offered at par with the investment grade and little credit risk. Goldman Sachs’ financial performance paints the picture of an investment bank holding its own through a high-interest rate environment by building deposits and mitigating against client withdrawals. If the bond is called in a lower interest rate environment, I would explore swapping the proceeds into the equity market. Until then, I will collect the 7% income and wait.