FILE - In this Oct. 16, 2014, file photo, a screen at a trading post on the floor of the New York Stock Exchange is juxtaposed with the Goldman Sachs booth. The Goldman Sachs Group, Inc. reports earnings Wednesday, Jan. 17, 2018. (AP Photo/Richard Drew, File)
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To appreciate how the business model of Goldman Sachs has evolved in recent years, there is no need to pore through its annual report. Instead, simply glance at the cover sheet of a lawsuit filed two weeks ago.

United Natural Foods Inc (UNFI), a grocery wholesaler, is suing Goldman in a New York state court over the bank’s work on a messy $3bn acquisition.

For decades Goldman has been the pre-eminent M&A adviser on Wall Street, but in recent years it has dived headfirst into deal finance — giving clients like UNFI the chance to get all their transaction needs under one roof.

That is reflected in the fact that the UNFI lawsuit targets three different entities — Goldman Sachs Group, Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC.

One consequence of this business shift is, of course, juicy fees. Goldman has emerged as a dominant provider of so-called leveraged loans, used to fund riskier M&A deals, with its executives touting the bank’s number-one ranking in selling the lucrative product.

But Goldman has been dogged by the perception that it puts its own interests ahead of its clients.

UNFI alleges that Goldman — after last year providing M&A advice to clinch the acquisition of rival Supervalu — cheated UNFI on the financing. The claim threatens to taint the Wall Street bank’s prestige and ability to cross-sell its array of services to chief executives. 

In its complaint, UNFI refers to Goldman as its “trusted financial adviser” for the Supervalu deal as well as its “good-faith lead arranger” in drumming up the $2bn of cash UNFI needed to finance it.

To close the deal, Goldman’s bank guaranteed UNFI would have the funds to pay Supervalu shareholders.

The elegance of leveraged loans for big banks is that — in normal circumstances — they are low-risk: the debt is syndicated to mutual funds, hedge funds and other investors.

If syndicating the loan proceeds smoothly, tensions between bank and client should not arise.

Unfortunately for UNFI, the debt markets in early autumn 2018 wobbled and both UNFI and Supervalu reported poor financial results — all of which hampered investor interest in the loan.

This meant that the syndication process potentially put Goldman in an adverse position to UNFI that, perhaps naively, still considered Goldman its “trusted adviser”. 

Goldman had the right, in the first instance, to raise the interest rate on the loan by up to 1.5 percentage points to attract buyers. But if not enough buyers stepped up even then, Goldman was on the hook.

As a result, Goldman made a series of technical moves to syndicate the loan that UNFI claims limited its flexibility and potentially made it more onerous to repay the debt. Either Goldman’s manoeuvres were permitted by the legal agreement between Goldman and UNFI, or they were violations; the court case will decide which.

What is not in dispute is that Goldman’s actions were painfully costly to UNFI. The bank used a clause in the agreement to withhold $40.5m of the loan proceeds, claiming that UNFI did not fulfil its own obligations in the marketing period of the loan.

“Goldman Sachs believes that these claims are entirely without merit. We intend to vigorously defend ourselves against these accusations,” the bank said in a statement. 

From Goldman’s point of view, it simply enforced the letter of the agreement with a company that was a client, but also a counterparty and one with other sophisticated legal and financial advisers.

UNFI does not see it in such black-and-white terms. According to the legal complaint as well as discussions with multiple people involved in the transaction, UNFI believed that Goldman would do everything in its power to protect it from the markets’ rough sailing.

After all, its lead banker had been close to the company’s chief executive for years and, from chief executive David Solomon on down, Goldman constantly repeats that it has a “client-first” doctrine.

That Goldman did not do more to cushion the impact of tough market conditions on its client has fuelled feelings of betrayal, according to UNFI. 

In 2018 Goldman earned revenue of $3.5bn for advisory work and $2.7bn for debt underwriting, respectively. The fees or losses from the UNFI transaction are immaterial to the firm.

It is natural to wonder if Goldman would have been more sympathetic to a heavyweight repeat customer, such as Blackstone or General Electric, rather than to a grocery distributor from Rhode Island.

Between 2009 and 2012 the author worked at Foros Group, which co-advised UNFI in the Supervalu acquisition alongside Goldman Sachs. Foros is not a subject of any legal action in this case.

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