BB+ Brazil vs. AA- Goldman Sachs

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

As of yesterday 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 A+ rated subordinated bonds 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 US$61 billion (down 40% from last year’s high), and shareholders equity of US$42.8 billion (as of 11/07), those A plus-rated 7.9% yielding bonds seem to have plenty of cushion under them. (Goldman’s long term debt is AA- rated, a notch above the sub notes).

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

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.

MRM
Hat tip to TS
(disclosure – I own GS)