Goldman Sachs one-year notes linked to 22 Spanish stocks could be focused play on Europe

By Sheri Kasprzak

New York, Aug. 29 – The week saw two relatively uncommon offerings, including a deal linked to a basket of 22 Spanish stocks.

Goldman Sachs Group, Inc. priced $12.21 million of 0% notes linked to the ordinary shares of the 22 Spanish companies included in the MSCI Spain 25/50 index.

The basket includes Amadeus IT Holding SA, Banco Bilbao Vizcaya Argentaria, Banco De Sabadell SA, Banco Popular Espanol, Banco Santander SA, Bankia SA, Caixabank SA, Gas Natural SDG SA, Iberdrola SA, Inditex, Red Electrica Corporacion SA, Repsol SA and Telefonica SA, each with a 5% weight; Abertis Infraestructuras SA with a 4.842% weight; Ferrovial SA with a 4.72% weight; ACS Actividades de Construccion y Servicios SA with a 4.514% weight; Enagas SA with a 4.464% weight; Grifols SA with a 4.001% weight; Consolidated Airlines Group SA with a 3.727% weight; Distribuidora Internacional de Alimentacion SA with a 3.498% weight; International Mapfre SA with a 2.856% weight and Zardoya Otis SA with a 2.378% weight.

European deals in general have gained in popularity, said Tim Mortimer, managing director with Future Value Consultants in London, in an interview Friday.

“The S&P has gone through an all-time high,” Mortimer said.

“Europe has not gone up as much as the U.S. in the last few years.”

Why might a client choose a stock basket over the index? Mortimer said the client could be aware of the index but prefers general stock trades, which might be easier to hedge. It could also be a way to achieve a play in the European market. Additionally, the weightings for this particular note could be different from the weightings of the index.

Investing in the stocks is taking a risk, which is worth about 3.5% as seen by the fair value, Mortimer noted.

The payout at maturity on the one-year notes will be par plus the basket return with investors sharing in any losses.

Bank-linked notes ahead

Moving to another interesting deal from the week, Bank of America Corp. is set to price 0% relative value Strategic Accelerated Redemption Securities linked to a basket of three equally weighted financial industry stocks versus the iShares Barclays 20+ Year Treasury Bond fund.

The stock basket includes Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.

The notes will be called at par of $10 plus a premium of 9% to 13% per year if the stock basket performs at or above the level of the T-bond fund on any of the three observation dates. If the notes are not called, investors receive par at maturity unless the basket finishes below the T-bond fund, in which case investors are exposed to the relative decline.

“The banking sector’s not been out of the news in the last eight years,” Mortimer said.

“I suppose some investors think it’s a good time to buy in the banking sector.”

The notes have calls at six, nine and 12 months, and the basket must outperform the ETF by any amount in order for investors to get the call premium, which would be 4.5% to 6.5% on the first call date.

“At an average of 5.5%, if you stay there for one year, you get 11%, and then if the product isn’t called, you suffer the downside. There’s a max 11% return, which is quite a high return,” Mortimer said.

“The reason it is so high is because the three stocks have been highly volatile and correlative since they’re all in the banking sector.”

The hope here seems to be that interest rates will go up in the next year. Mortimer noted that this is the only advantage of going into an offering with such a short tenor – one year.

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