Goldman, Sachs & Co., investment bank to the corporate elite, is preaching the gospel of leveraged finance.

The firm is zealously pursuing emerging and non-investment-grade companies with a fervor it had previously reserved for blue-chip corporations. The higher purpose: to maintain its position atop an increasingly cutthroat corporate finance market.

"Our competitors are using" leveraged finance "to drive their way into our business," said John Townsend, managing director and co-head of Goldman's leveraged finance group. "We have to defend our turf by being equally capable of growing our franchise in this area."

To that end, Goldman recently unleashed a series of internal changes designed to integrate more closely its service of leveraged credits - those priced at the London interbank offered rate plus 150 basis points or more. The firm united its leveraged-loan and high-yield origination efforts under Mr. Townsend and managing director Jon Winkelried, creating a 50-member leveraged finance team.

By sharpening its focus on leveraged finance, Goldman is charging into the business in which commercial and investment banks most frequently collide. Other bulge-bracket firms have added leveraged lending to their offerings, while commercial banks have forged into underwriting high-yield bonds.

But Goldman doesn't just want to join the leveraged finance crusade - it wants to lead it.

The firm wants to "be at the forefront of what will ultimately be the logical way to approach the business, complementing our capabilities in equity and M&A," said Mr. Townsend, 42. As Goldman sees it, the growth companies of today are the blue chips of tomorrow.

In the past year, Goldman has landed mandates for a slew of non- investment-grade companies, including Pacificorp, Lucent Technologies Inc., Allied Waste Industries Inc., and Brooks Fiber Properties Inc. All of these deals - which included bank loans, high-yield bonds, and other services - were noted for their complex structures.

The firm was ranked as the eighth-largest leveraged lender in the first half of this year, leading eight issues worth $2.5 billion, according to Securities Data Co. Although Goldman commanded only 3.7% of the market, it was the only bulge-bracket firm to crack the top 10 during that period.

Though competitors and other market players commend Goldman's aggressive approach, motivation, and experience, some contend that it has had difficulty persuading its relationship managers to market bank loans, a cornerstone of leveraged finance. Other products that Goldman offers - such as initial public offerings, equities, and mergers and acquisitions advisory - provide much juicier fees.

"At other firms, there's the bank debt or high-yield product, but at Goldman, given the traditional roots of the firm, there is more of a mind- set change," one banker said. "It's been a learning process for them and taken them a while to get comfortable with it."

But Goldman's bankers maintain that their commitment to lending is solid.

"Our professionals who have investment banking services client responsibility have discovered the power of the product," Mr. Townsend said. "Leveraged finance is often the first opportunity you encounter with a client when developing new relationships, when they're still in the growth mode and very much in need of capital."

Goldman is hardly new to the loan market. It started trading and selling loans seven years ago, tapping Bear, Stearns & Co. veteran Robert O'Shea for the task.

Mr. O'Shea is credited with developing the first secondary loan trading shop that was not captive to a loan origination effort. Goldman commands roughly 27% of the secondary loan trading market.

Two years ago, Goldman began originating loans, bringing over Edward Forst, 36, Bankers Trust New York Corp.'s head of U.S. loan sales and trading.

"Given our strength in the secondary market, we have a very educated sense of how a syndication is going to go, and we understand the liquidity and the credit risk," Mr. Forst said.

Mr. Forst is now a managing director and co-chief operating officer in Goldman's leveraged finance group. His co-chief is Adrian Kingshott, 36, a vice president who moved to the team from Goldman's investment banking unit. Mr. O'Shea heads up sales and trading and is co-responsible for originations.

The firm recently refashioned its leveraged finance team into groups of industry and regional specialists so that it mirrors Goldman's investment banking services group, which manages Goldman's corporate relationships.

"This has been important so that now, and increasingly over time, we have leveraged finance bankers that can deal with the whole capital structure," said Mr. Winkelried, 37. "When you work with clients that have a leveraged capital structure, it's important not to have a product bias.

"There's a convergence going on, and you've got to have people who are expert in how to get these deals done," Mr. Winkelried added. "To a certain degree, you have to marry specialization with cross-fertilization in order to do it right."

Goldman clients say the firm has done just that.

"Goldman understands our business," said David Solomon, Brooks Fiber's chief financial officer. "Our company is relatively new, and it's helpful to have an organization with a great deal of familiarity with us."

In July, Goldman made a $250 million loan to Brooks Fiber, a competitive local exchange carrier in St. Louis. Goldman had taken the company public in 1996 and led $750 million of high-yield bonds for it. But the loan was the company's first large credit facility, and Brooks wanted to be sure it did not conflict with the terms and conditions of its existing high-yield covenants.

"One of the things that stood out was the analysts who were able to articulate our story to the banking community," Mr. Solomon said. "This was our initial entry into the commercial banking market, and they did a good job of assisting us in educating the marketplace."

Another satisfied customer is Allied Waste, which tapped Goldman for a $1.275 billion financing last fall. The deal backed Allied's acquisition of Laidlaw's solid-waste businesses and included a $900 million term loan and a $375 million high-yield offering.

Although Allied had a plethora of solid commercial banking relationships, Henry Hirvela, its chief financial officer, said he turned to Goldman because in previous jobs he had had positive dealings with the firm.

"Given the speed, the size, and the complexity of the deal, we needed M&A, capital markets service, and general access to bank credit markets," Mr. Hirvela said. "Goldman offered us a full turnkey of products."

When the loan was offered to the market in November, it was 2.5 times oversubscribed.

For any player in leveraged finance, the leveraged buyout firms are among the most coveted customers. And like other bulge-bracket firms, Goldman has been criticized for its coverage of them.

The contention is that Goldman's gargantuan M&A practice - a rich source of the financing ideas that LBO firms so highly value - is a conflict of interest. Goldman and other investment banks are vying not only to sell companies to LBO firms but also to lead the financing on those deals.

"It's a dangerous game," one banker said. "It's not insurmountable, but it is something you have to be very cautious and open about with both sides."

Also, some say that Goldman's own merchant banking arm, GS Capital Partners, which has invested alongside financial buyers in companies such as AMF Group and Amscan Holdings Inc., competes with the LBO firms it is trying to serve.

But Goldman says its deal flow differs from the kind of opportunities its bankers bring to LBO firms.

"The instances of conflict are fewer than you would imagine," Mr. Townsend said, adding that the merchant banking arm is not involved in public auctions and invests in transactions with minority controlling stakes.

"We have made a dedicated commitment to cover these firms," Mr. Townsend said, and the LBO firms "are very important constituents."

But they are only part of a larger commitment that Goldman bankers said they have made to the leveraged market. And that's not something to be taken lightly, they said.

"When we make a commitment, we are a stayer," Mr. Winkelried said. "And when markets out there aren't so robust, there will be a group of us left standing that people will be able to rely on."

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