Goldman’s $1.07 billion leveraged notes tied to index basket set new record, No. 2 in size ever

By Emma Trincal

New York, Feb. 3 – Goldman Sachs Group, Inc.’s $1.07 billion of 0% leveraged notes due Feb. 23, 2017 linked to a basket of indexes represent the second largest U.S. structured note offering to price in more than 10 years, according to data compiled by Prospect News.

This deal was the second largest structured note offering going back to June 2005, according to the Prospect News database.

The No. 1 deal was UBS AG’s $2 billion of 22% mandatory exchangeable notes due Aug. 15, 2007 linked to Time Warner, Inc.

The data does not incorporate exchange-traded notes nor does it include plain-vanilla fixed-income products such as step-up notes, fixed-to-floating notes and capped floaters.

The underlying basket in last week’s deal consists of the Euro Stoxx 50 index with a 58% weight, the FTSE 100 index with a 19% weight and the Topix index with a 23% weight.

If the basket return is positive, the payout at maturity will be par plus two times the basket return, subject to a 27% cap. If the basket return is negative, investors will be fully exposed to the decline.

Wealthy individuals

It was not clear who the client may have been.

“Despite the enormous size, it looks like individual clients to me, at least not a large institution ... maybe ultra-high net worth, something done through a [registered investment adviser],” said a market participant.

“RIAs are embracing international allocations. It could be that type of account.”

He said that the 13-month tenor and the fee induced him to make this assumption.

“The term is over one year. It suggests retail trying to limit their tax rate. Institutions don’t mind going shorter,” he said.

The fee is 1.1%, according to the prospectus.

“The fee is high for an institutional account. That’s more like retail.”

The exceptional size reflected the quality of the structure as well.

“It has a high cap for something close to a year. It’s short-term. It has the leverage. It’s also very simple, easy to understand. It makes sense,” he said.

Quanto

The notes had been bought for asset allocation purposes, he said.

“More people want to bet on international stocks. A lot of money is in U.S. equity. In this environment, people want diversification,” he added.

Getting foreign equity exposure through a structured note offers a unique advantage, he said, pointing to “quanto.”

He explained: “Unlike ETFs, structured notes give you international exposure without the currency risk. The deal is priced in U.S. dollars. They give you the amount of return of the underlying. There is no exchange-rate risk. This is what we call ‘quanto’ in derivatives jargon.

“When you buy an ETF, it’s very different. You’re subject to exchange-rate risk. Some sponsors offer what they call currency-hedged ETFs. I’m very skeptical about those products. They’re not telling you how they’re hedging, what, when and how much.

“Structured products have a clear formula. It’s totally transparent. When it comes to investing in non-U.S. assets, the benefits of quanto tend to be overlooked.”

One-of

An industry source said the buyer must have been one or a small group of large investors.

“This is a very, very big deal. Given the size, I wouldn’t think it’s a retail account,” he said.

“Goldman is not going to sell $1 billion to 20,000 clients.

“It was probably one or two accounts representing the majority of the trade.”

The fact that Goldman Sachs issued the notes through Goldman Sachs Group, Inc., the bank’s holding company, piqued his interest.

Up until last year, Goldman has issued from the parent company. But since last year, an effort from the firm has been made to accelerate the pace of issuance from GS Finance Corp., a subsidiary.

Not a GS deal

“They did not issue it under their GS Finance platform, which is intriguing,” this industry source said.

“They’ve been doing a lot of GS Finance deals last year. From what I understand, they intend to use it more and more as a way to comply with TLAC.”

TLAC stands for total loss-absorbing capacity. It is a minimum capital requirement that originates from Basel III regulations as well as the Federal Reserve Bank’s proposed rules.

“This one was done through the holding company. I would think it was a reverse inquiry. A large institution wanted a structured note, and they needed Goldman Sachs as counterparty. While GS Finance debt is guaranteed by Goldman Sachs, some may prefer to see the notes issued directly by the holding company. It’s just my guess.”

Goldman Sachs & Co. is the underwriter.

The notes priced Jan. 29.

The Cusip number is 38148TLP2.

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