GS Finance’s $52 million autocall index-linked notes offer global exposure, hybrid structure

By Emma Trincal

New York, July 14 – GS Finance Corp.’s $52 million of 0% autocallable index-linked notes due July 5, 2024 tied to the least performing of the FTSE 100 index, the Euro Stoxx 50 index and the MSCI EAFE index illustrate the growing popularity of a hybrid structure combining leverage and an automatic call for investors seeking to diversify away from U.S. equity markets, sources said.

The notes will be automatically called at par plus 15% if each index closes at or above its initial level on July 8, 2022, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and each index finishes at or above its initial level, the payout at maturity will be par plus 2.3135 times the return of the least performing index. Otherwise, investors will lose 1% for every 1% that the least performing index declines below its initial level.

Overseas positioning

“It’s an interesting deal,” a buysider said.

“If you believe that international markets are slowly improving, you can easily outperform.

“The market is up 5%, you get called, that’s 15% in one year. Nice return for your clients.”

Investors can also outperform if the notes mature.

“It’s also a leverage play. With a 2.3x leverage you can outperform not just the worst-performing index but the other ones too.”

The underlying indexes can be used for asset allocation purposes.

The underliers provide exposure to the United Kingdom, the eurozone and the developed markets ex-North America.

“These are highly correlated indices. That’s a plus,” he said.

Both the constituents of the Euro Stoxx and FTSE 100 are European stocks and 61.5% of the EAFE index consists of European equity.

“If you think the U.S. market is overvalued and that it’s time to take some chips off the table and go overseas, this is an attractive note,” he said.

One risk associated with the call scenario is if the worst-performing index returns more than the call premium.

“If it’s up 20% and you get 15%, it can’t really hurt,” he said.

A greater risk is the full downside exposure to a market drop.

“I always prefer some buffer in place. But you probably shouldn’t expect protection when you can make more than double the return in three years without any cap.”

Range bound view

The choice of underlying indexes was unusual, a market participant said.

“It’s interesting. The FTSE is never used in the United States. The Euro Stoxx 50 was popular for a while, but we don’t see it very often anymore.

“Maybe it’s a private bank deal with a view in line with the analysts or the research group of the bank.

“If you want international exposure, it’s a pretty good way to play it.”

He focused on the unusual structure.

“It looks good. If I’m bullish about the market, I’m not sure how I feel about it though,” he said.

“It’s definitely for someone who has a range-bound view on international stocks.”

The hybrid characteristic of the note, which pays a call premium after one year and leverage on the upside at maturity was the most intriguing aspect of the deal.

Despite its leveraged return attribute, the structure was still not a bullish play in his view as the likely call reduced the odds of holding the notes until maturity.

“You offer investors an opportunity to cash in after one year, giving them 15%, which is fairly good especially if the market is flat and that’s really what you should expect if you buy this,” he said.

The note was designed for investors with a sideways outlook on international equity for the first year with higher return expectations as time passes, he said.

“If you expect a 10% a year growth in the next three to five years, the leveraged, uncapped return at maturity is great.”

Stand-alone product

Since the structure is both a return enhanced note and an autocallable product, it is tempting to compare it to either one of those structures. But the similarities have their limitations, he said.

“It has an autocall but it’s not really an autocall. People buy structured notes for the protection. Unlike income products, this one doesn’t offer any barrier or buffer,” he said.

The full downside exposure and enhanced return on the upside, called for parallels with a particular type of leveraged product known as Accelerated Return Notes (ARNs).

The $52 million size of the deal is also a characteristic shared with the popular ARNs, which tend to be block trades.

Typical ARNs have a 15-month maturity. The return is most often linked to the S&P 500 index. Investors get triple the index gain with a high cap. The downside is not protected.

This market participant saw little ground for comparison between the two structures.

“This is an entirely different product altogether because it’s a longer-term note, it’s tied to a worst-of international basket, not the S&P and there’s this autocall after one year,” he said.

“You’re really dealing with a hybrid.”

“It’s not growth, it’s not income.

“It’s a way to express two different sets of return expectations at two different points in time.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on July 7.

The Cusip number is 40057HP20.

The fee is 3.75%.

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