Goldman Sachs' $3.03 million trigger leveraged notes linked to Euro Stoxx 50 offer sweetener

By Emma Trincal

New York, Feb. 6 - Goldman Sachs Group, Inc.'s $3.03 million of 0% trigger leveraged index-linked notes due Feb. 20, 2014 linked to the Euro Stoxx 50 index offer a somewhat innovative structure that gives investors a higher upside potential at maturity when the index records a 5% or more decline early in the life of the notes.

A trigger event occurs if the index level declines by 5% or more from the initial level during the observation period, which is each trading day from but excluding the pricing date to and including May 2, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is positive and a trigger event has not occurred, the payout at maturity will be par plus 200% of the index return, subject to a cap of 20%.

If the index return is positive and a trigger event has occurred, the payout will be par plus 320% of the index return, subject to a maximum return of 32%.

Investors will be fully exposed to the losses if the index return is negative.

The final index level is the average of the closing index levels on the five business days ending Feb. 14, 2014.

Out of the money

"It's pretty interesting. I can see the rationale," a market participant said.

"It's a down-and-in type of option. OK, I'll give you two times leverage and a 20% cap, but if the market is down 5%, I will give you more. Of course they give you more only when the market is down.

"You're already 5% out of the money. So at a price of 95, we'll give you another 100 notional and a higher cap, but you only get that if the market goes down. Obviously in that case, the options are cheaper."

This market participant compared the structure to two hypothetical deals.

"In the first deal, I give you two-times leverage and a 20% cap from the initial spot price of 100. Deal No. 2, you get three times up and a 30% cap, but the appreciation only starts at 105. It's like saying I'll give you more but you don't get to participate in the first 5%. Which one of those deals is better? It's not obvious," he said.

"You have to wonder if it's so great when you're already 5% out of the money.

"I'm not saying it's necessarily a bad deal. But it's not like wow! I wish the market would go down so I can get more! It doesn't work like that.

"It's simply that if it goes down, they'll give you a bit of a sweetener. But remember, you want the market to go up. That's how you can put money in the bank."

The notes (Cusip: 38141GMZ4) priced Feb. 1.

The fee was 1.1%.

Goldman Sachs & Co. was the underwriter, and J.P. Morgan Securities LLC the dealer.

Another deal

Separately, Goldman Sachs priced a similar deal the same day. It was $565,000 of leveraged currency-linked notes due Feb. 18, 2014 linked to the performance of the Mexican peso relative to the dollar.

The trigger level is also 95% of the original spot rate but can be observed any day during the life of the notes. If the trigger event does not occur, the payout at maturity will be par plus three times any gain in the peso versus the dollar, up to a 22.6% cap.

If the currency appreciates at maturity but the 5% trigger is hit during the term, the payout is par plus five times the gain, capped at 37.75%.

If the currency finishes below the initial level, investors are exposed to the losses.

JPMorgan was also the distributor. The currency notes (Cusip: 38141GMW1) carried the same fee.

"They printed the two deals. They're able to get investors. These are not big sized deals, however. Maybe they're just testing the water and see if people can understand these kinds of structures," the market participant said.

"It's always exciting to see more structures in the market. People get more choices. So I applaud the innovation. And obviously this structure serves a purpose. It is clever. But I'm not saying it's the best deal out there."

Guy Gregoire, former syndicate manager at Pershing, commenting on the first product, said that the structure was bullish in essence but that investors had to be even more bullish when the 5% decline occurred.

Oddly bullish

"It's a bullish structure because investors get full exposure to the downside, so you'd better be bullish. It's also bullish because the market has to go up in order to make money," Gregoire said.

"But it's kind of an odd structure. The buyer wants the trigger, he wants the 5% decline in the first three months, but ultimately, he wants the market to rebound.

"As the investor, if you're looking to get that 32% cap, something bad needs to happen first and then something even better needs to happen on the upside. You need to get the trigger and then recover from the trigger.

"I have no idea why an investor would hold that type of view.

"You get paid the most when you have an initial 5% decline. It's a curious wrinkle to what is essentially a bullish structure."

The best outcome - the trigger is hit - gives investors an even more bullish structure than the other scenario, he said. Instead of a 20% cap, investors get 32% and the leverage factor increases to 3.2 times from two, he noted.

"But with the 5% decline, you're starting at a higher strike of 105, not at par. So yes, you do get a more appealing upside. It's a much more bullish structure. They give you more potential upside, but you need a much better performance to get there," he said.

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