GS Finance’s $11.37 million notes on Stoxx show solid cap for bullish bet

By Emma Trincal

New York, April 8 – GS Finance Corp.’s $11.37 million of 0% Buffered PLUS due Oct. 5, 2026 linked to the Euro Stoxx 50 index provide competitive cap and upside leverage but the buffer may not be sufficient, suggesting that the notes would be best suited to bullish investors seeking exposure to the euro zone, advisers said.

If the return of the index is positive, the payout at maturity will be par plus 200% of the index return subject to a maximum return of par plus 41.6%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

Scott Cramer, president of Cramer & Rauchegger, said he liked the structure but not the underlying investment theme.

Risk-reward

“I do think the risk-reward is here,” he said.

“But you have to be willing to be exposed to Europe. Clearly, Europe is a little bit more fragile than the U.S.

“The buffer could easily come into play. 15% is not a lot.”

The euro zone could feel the pinch of a U.S. recession without mentioning its own difficulties, he said.

Sick man of Europe

“You’re taking the risk of something going bad in Europe for the next two-and-a-half years.

“Now if I’m looking for exposure to the Euro Stoxx, I’d rather take the note. The risk-reward is better than investing straight out in the index because of the protection and the leverage,” he said.

But Cramer was not comfortable with the fundamentals of the European economy.

“If I compare our economy with Europe and the rest of the world, the U.S. is the best house in a bad neighborhood.”

While the U.S. economy is “doing fine” at the moment, it could easily fall into a recession, he noted.

“In that case, Europe will follow us,” he said.

That’s because as the saying goes, “when the U.S. sneezes, the world catches a cold.”

But the impact on the euro zone may be even harsher given the weakness of the euro zone’ s economy, he said.

Deindustrialization

Germany, formerly the strongest economy of the block, is now struggling. It is now labeled again the “sick man of Europe.”

“They don’t have a lot of GDP. They’re not growing.

“They’re not as capitalistic as we are. Their economy is just not great,” he said.

Germany is going through a phase or deindustrialization, he noted.

“Many big manufacturing companies are leaving to other countries, including in Asia,” he said.

BASF, the chemical giant, is relocating part of its manufacturing operations outside of Germany, he said, adding that the company is cutting jobs and closing plants.

Other big manufacturers are also leaving Germany, he noted.

“Taxes are very heavy. Energy costs are very high. These things are not conducive for business,” he said.

Alternative to long position

Cramer said his firm allocates to international equity but remains cautious about European equities.

Despite those concerns about the underlying index, the structure was attractive.

“The 15% buffer on the note is not a lot. But you are getting a good return,” he said.

The 41.6% cap with two-times leverage on a two-and-a-half-year tenor represents nearly 15% per year on a compounded basis.

“If we wanted to allocate to the region, the note would be a better choice than buying the index,” he said.

Fair structure

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, liked the payout on the upside.

“The cap is not bad, actually not bad at all,” he said.

“If you’re bullish or mildly bullish on Europe it’s a reasonable note.”

As with any structure, investors had to be comfortable with the tradeoff between potential gains and limited protection.

“The buffer is not going to protect you against tail risk. But you do have a high cap.

“For Europe to be up 41.6% in two-and-a-half years, that’s kind of a tall order.

“So, I think it’s reasonable,” he said.

Two-and-a-half-years was an intermediate term, he said.

“For us, anything longer than two years is long term.

“I don’t love the tenor, but again you’re getting the upside.

“I just wish the buffer was a little bigger,” he said.

One way allowing the issuer to price the 2x leverage was the use of the dividends, which are not paid to the noteholders. The Euro Stoxx 50 index has a 3% dividend yield.

Buffer plus

“OK, so you’re losing 7.5% in dividend. But to get a 42% cap. I think that’s OK,” he said.

In addition, buyers of structured notes always give up dividends in general, he added.

“The big dividend pays for the leverage. But I don’t think you need leverage. You’d be fine without it. I’d rather forgo the leverage and get a larger buffer,” he said.

By modifying those parameters, Chisholm said he would expect to keep the cap at the same level.

The enlarged buffer would be enough to make the note attractive.

“Europe seems to be going in the right direction as the rest of the world,” he said.

“People are bullish on everything.

“It’s not a bad note. But you still need the right downside protection.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent. Morgan Stanley Wealth Management is acting as dealer.

The notes settled on Thursday.

The Cusip number is 40057YQP1.

The fee is 3%.

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