BB+ Brazil vs. AA- Goldman Sachs: Who's Got the Better Credit Rating?

It wasn’t that long ago that Brazil was a fiscal basketcase. But these days, the global credit markets are telling us that it’s a better credit than Goldman Sachs (GS).

As of Monday morning, Goldman’s 2037 6.75% bonds were trading at 85.441, implying a yield of 7.9%. Brazil’s 2037 7.125% 2037 bonds have rallied to 107.19 - generating a yield of 6.647%.

When these two bonds were issued, Goldman’s commanded a rate that was 37.5bps lower than the nation of Brazil. In less than a year, Goldman’s 30-year bonds have backed up 130bps, and are now paying a 340bps premium vs. the 30-year U.S. government bond.

With Goldman sporting a market cap of $61 billion (down 40% from last year’s high), and shareholders equity of $42.8 billion (as of 11/07), those AA minus-rated 7.9% yielding bonds seem to have plenty of cushion under them.

Brazil has performed incredibly well since 2005, when it owed the world $400 billion. Today, it is a net creditor, and expecting to be upgraded to “investment grade” later this year, according to Merrill Lynch (MER).

AA minus bonds are yielding higher than BB+.

Is there a disconnect here? It appears that markets have become so distrusting of the rating agencies that investors will even doubt the credit rating of Goldman itself.

Disclosure: I own GS.

Comments

[dieuwer]

Rating agencies to banks and brokers, are as Arthur Anderson to Enron.
Ratings are just a joke. I bet that if Brazil would have it own domestic rating agency, it would rate the brazilian sovereign bonds investment grade, while US treasury bonds "junk".
Remind this: "ratings are in the eye of the beholder".