Vodafone Spat Latest in Credit Line Refusals

In the normally genteel world of corporate finance, some nasty tiffs between financiers and clients have broken into public view this year.

This week, Vodafone Group ejected Goldman Sachs Group Inc. from a $15-billion financing program after the investment bank refused to offer a $450-million credit line to the world’s biggest wireless phone company.

Goldman, which managed Vodafone’s initial public stock offering 12 years ago, declined to join 39 banks that committed to lend $14.5 billion to the British firm, a Vodafone spokesman said.

In response, Vodafone said it will remove Goldman as a broker in the $15-billion short-term funding, or commercial paper, program.

Vodafone is following Ford Motor Co., which earlier this year said it would lock out Goldman and Morgan Stanley Dean Witter & Co. from business if they didn’t commit credit lines.

Goldman spokesman Simon Eaton declined to comment.

Goldman and its biggest rivals want to limit their less-profitable businesses--such as extending credit lines--to instead concentrate their capital on higher-fee activities such as underwriting stocks and advising on mergers.

Vodafone turned to Goldman last year for merger advice when 3Vodafone bought Mannesmann for $161 billion. So Goldman’s refusal to extend a credit line now may have particularly irked Vodafone, analysts said.

When an investment bank balks at taking business, it’s telling the company that “I’ll take all the parts that I want to do and you’re on your own on the parts that aren’t attractive,” said Patrick Jacob, co-head of global debt sales at Dresdner Kleinwort Benson in London.

Traditional lenders such as Deutsche Bank and Dresdner Bank are trying to expand onto Goldman’s turf of underwriting stocks and bonds, and they’re also willing to extend credit to help win business.

Investment banks, in turn, are under pressure to provide their big clients with cheap credit lines. Earlier this year, Ford asked Goldman for $250 million as a condition for awarding more profitable investment banking business. Goldman refused.

Last month, however, Goldman provided Wal-Mart Stores Inc. with about $100 million of credit.

More recently, Goldman, along with Morgan Stanley, declined to join a group of banks providing a $10.5-billion loan to Deutsche Telekom, said an arranger of the loan.

Providing backstop lines of credit for investment-grade companies generates hardly any profit for brokerages. The lines use up hundreds of millions of dollars for fees as low as 0.05%. That compares with 0.5% for underwriting investment-grade bonds.

If a credit line’s maturity is more than one year, the lender must set aside 8% of half the total in case it’s drawn upon--$10 million for a $250-million credit line.

Clients such as Vodafone and Ford ask investment banks to provide them with emergency credit lines in case they’re shut out of the commercial paper market, as some were after Russia defaulted on debt payments in 1998. Short-term unsecured debt is typically provided by commercial banks, which have more capital than securities firms.

Goldman still counts Vodafone as a major client. The bank and Merrill Lynch & Co. are managing the upcoming initial public offering of Verizon Wireless Inc., worth about $15 billion. Vodafone owns about 45% of Verizon.

Meanwhile, commercial banks have been expanding their investment banking business after last year’s repeal of Depression-era laws limiting their securities activities. That has prompted a wave of mergers, including Chase Manhattan Corp.’s planned acquisition of J.P. Morgan & Co.

“I can understand why Goldman wouldn’t want to provide the credit because it’s a low-margin business,” said one analyst. “But there are other bulge-bracket investment banks capable of providing big commercial bank loans. This is putting the heat on investment banks.”