A busted Goldman airline deal is investigated by private detectives

It was a fundraising like none other: An unusual structure, Goldman Sachs teaming up with two obscure brokerages and the controversial financier, Lars Windhorst, acting as one of the deal's architects behind the scenes.

Investors snapped up the $1.2 billion in bonds that, in turn, channeled proceeds to a cluster of airlines linked to Etihad Airways. Within months, bankers handling the sale were crisscrossing the Atlantic, collecting awards for their creativity.

Two years later, the deal went bust.

A group of creditors is now resorting to unconventional tactics to recoup losses. They've hired a private intelligence firm. The mission: Dig out details into how the deal came together, including the roles played by Mr. Windhorst, the airline and the fundraising group, according to people with knowledge of the situation.

The brewing fight places another unwelcome spotlight on Goldman Sachs Group Inc.'s willingness to raise large pools of capital in unorthodox or risky deals. It also threatens to drag the Wall Street giant into another blowup over its ties to Mr. Windhorst, whose web of business dealings has drawn fresh scrutiny in recent weeks.

"There were a lot of strange characteristics," Roger King, an analyst at research firm CreditSights, said of the bonds Goldman helped sell. "It was a bizarrely complicated deal. A hairy deal no matter who brought it."

One question at the center of the airline fundraising in 2015 and 2016 is why Goldman agreed to fill the breach as another big bank, HSBC Holdings, dropped out, according to the people with knowledge of the matter. Such a large financing probably couldn't be completed without the help of a global bank.

Creditors including investment managers BlueBay Asset Management and Gramercy Funds Management have enlisted the private investigators to help them push for maximum recoveries from the busted bonds, the people said. Representatives for the two funds declined to comment or identify whom they've enlisted.

Their effort contrasts with the typical reason that investors hire corporate spies. Usually, bondholders hire intelligence companies in less-developed countries to track down assets or follow the cash trail, said Robert Southey, founder of Southey Capital, a London-based broker. It's relatively rare to get private investigators to look into deals that involve one of the world's largest investment banks and a major airline group. One significant bondholder has already grown uncomfortable with the tactics, according to a person with knowledge of the situation.

Spokesmen for Mr. Windhorst and Goldman Sachs declined to comment for this story. A spokesman for Etihad said the airline doesn't comment on "rumors or speculation."

Etihad faced a big problem in 2015. To expand from being a regional carrier into a global player, the company had bought stakes in several smaller airlines around the world. But some — like Air Berlin — kept bleeding cash. Mr. Windhorst, once the German airline's largest shareholder, was looking to shore up its finances. Yet Air Berlin would have to pay dearly to tap global debt markets on its own.

Etihad's executives and Mr. Windhorst sketched out a rough plan, with Anoa, a small brokerage, tasked to work out the details, the people said. Special-purpose vehicles linked to Etihad, called EA Partners, would sell bonds. The EA Partners vehicles would then slice up the proceeds and offer loans of various sizes to the fleet of smaller carriers. Members of the airline group would make periodic payments to EA Partners, which would distribute interest to bondholders.

Anoa was an affiliated company of Mr. Windhorst's investment arm. The financier had been tapping into his connections to drum up business for Anoa with dreams of establishing it as a widely known boutique. The aspirations wouldn't pan out, and Anoa would eventually shut down. But in a sign of how close Mr. Windhorst was to the firm, its former chief executive officer is now CEO of Mr. Windhorst's own investment vehicle.

While Anoa was key to designing the transaction, it lacked the fundraising firepower of a global bank. HSBC was earmarked to lead the deal alongside Anoa and ADS Securities, an Abu Dhabi-based boutique. But shortly before the sale was to proceed, the British bank was suddenly out.

Anoa's participation was among reasons that HSBC grew hesitant, but Etihad executives also fretted about whether the bank was committed enough to carrying out the complex transaction, according to three people familiar with the situation. Representatives for HSBC and ADS declined to comment.

Goldman Sachs stepped in.

First, the Etihad deal had to be cleared through a number of internal committees at Goldman because of the transaction's structuring oddities and the involvement of a sovereign entity, Abu Dhabi, the ultimate parent of Etihad, one of the people said. Windhorst's involvement was another potential issue.

A high school dropout, he was once hailed as one of Germany's most talented entrepreneurs before bankruptcies and lawsuits. But in the summer of 2015 his reputation was on the mend, and bankers were showing renewed interest in handling his business.

Though he didn't have a formal role in the offering, Mr. Windhorst was involved in designing the transaction and was present on at least one occasion when Etihad's then-leader presented the deal to investors in London, a person with knowledge of the matter said.

Yet it's unclear whether that was known to Goldman's compliance executives. The firm's internal watchdogs were wary of business ties with the financier. In September 2015 — when the first Etihad bonds were sold — Goldman's compliance officers resisted proposals by the bank's executives to take Mr. Windhorst on as a trading client because of concerns about his troubled past, according to communications seen by Bloomberg.

EA Partners issued a first set of junk-rated bonds totaling $700 million in September 2015. In April 2016, senior Etihad executives and then-Goldman banker Nader AlSalim were feted on stage with an industry award for the innovative structuring at a plush beachfront hotel in Miami.

Two months later, the financing team raised another $500 million, bringing the total to $1.2 billion. Offering documents show that 93.5% of the proceeds went to the airline group. In a typical sale, the rest goes to fees and expenses.

Not long after, the deal began to go awry. Airlines in the partnership — Air Berlin, Alitalia and Jet Airways — succumbed to financial woes. As they worked their way through insolvency proceedings, the EA Partners bonds cratered. Meanwhile, Etihad changed its strategy, no longer supporting the affiliate carriers before embarking on a management overhaul.

The bond documents themselves didn't explicitly guarantee support from Etihad. One banker who was involved in marketing the deal said there was always an implicit understanding that Etihad would provide support if needed, and that's how the debt was described to investors.

An investor group left holding the bag has hired law firms and financial advisers to help maximize recoveries — the standard practice when things go south on debt investments. The hiring of a corporate intelligence firm is much less common, especially one that scrutinizes financial firms involved, and not just the borrower.

Goldman's ties with Mr. Windhorst were documented in a lawsuit last year by a former executive, Chris Rollins. He accused the bank of scapegoating him to insulate itself from questionable transactions carried out with a financier who isn't identified in court records. That person was Mr. Windhorst, based on the descriptions in court documents and interviews.

Goldman is disputing Mr. Rollins' claims. And recently, it won a bid to push the case into arbitration, a move that would effectively keep a lid on more details of the firm's interactions with Mr. Windhorst.

"Whether in public or private, the evidence shows that top execs allowed these very large, risky deals to happen," said Seth Redniss, a lawyer for Rollins.