GS Finance’s $10.74 million notes on Stoxx 50, Stoxx Europe 600 offer international bull play

By Emma Trincal

New York, April 22 – GS Finance Corp.’s $10.74 million of 0% index-linked notes due April 22, 2026 linked to the Euro Stoxx 50 index and the Stoxx Europe 600 index provide uncapped leveraged return on European equity, a market expected to grow as it has underperformed the United States for some time, advisers said.

If each index finishes at or above its initial value, the payout at maturity will be par plus 241.7% of the return of the lesser-performing index, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the worst performing index falls by up to 30% and will be exposed to any decline in the worst-performing index otherwise.

Laggard rising

“Different research reports suggest the international space might do pretty well since it lagged the U.S. over the past 10 years,” said Steve Doucette, financial adviser at Proctor Financial.

The Euro Stoxx 50 index is a large-cap weighted index that tracks stocks of companies in the euro zone. The index is concentrated not only on a limited number of constituents but also in its country allocation. France and Germany together make for two-thirds of the index.

The Stoxx Europe 600 index offers a much broader exposure to Europe, tracking 600 large, mid and small capitalization companies across the entire region.

Structural benefits

“I do like those plain-vanilla notes. 2.4 times leverage with no cap. If the market continues up, you’ll outperform,” said Doucette.

“It’s a barrier so you may or may not outperform on the downside. But five years out, it’s safe to say you shouldn’t be down more than 30%.

“At the end, you might pick up some outperformance on the downside too.”

Old world exposure

European markets have rallied since last year’s coronavirus sell-off in March. The Stoxx Europe 600 index and the Euro Stoxx 50 index have gained 60% and 92%, respectively, since then.

“I would have to go and do my due diligence about these indices to make sure those two make the most sense,” he said.

One advantage of the pair was their high correlation to one another.

“But you still have to see if these are the best options. Sometimes when you swap an underlying for another, you can get better terms. The EAFE also gives you a pretty nice exposure to Europe,” he said.

The MSCI EAFE index tracks the performance of developed market equities, excluding the U.S. and Canada. More than 60% of the index consists of European stocks.

Cost management

For investors seeking broad international exposure, some modifications could be made to the notes, he said.

“Possibly I would look at changing one of the underlying benchmarks if I can improve the terms, especially get more leverage or reduce the length because we always prefer the three- or four-year space,” he said.

Doucette would also seek to lower the 3% fee as disclosed in the prospectus.

“Is 3% reasonable? We usually pay 50 basis points or 1% at the most. If you hold it to maturity it doesn’t matter. If you don’t, you’re eating that fee along the way,” he said.

Good length

For Matt Medeiros, president and chief executive of the Institute for Wealth Management, the tenor was a benefit not a disadvantage.

“Five years is great with this asset class and this structure,” he said.

“It’s a very interesting note. As the global economy continues to expand, you have enough time to generate growth. The fact that the upside is not capped makes it even more valuable. I would look at this as an appreciation play.”

The longer tenor also reduced some of the market risk.

“With a 70% barrier and a five-year term, I don’t really see a scenario in which you would breach at maturity.”

Return enhancement

Medeiros also liked the leverage factor.

“The 2.41 leverage is a good additive to what I think should be a positive return at the end of the five years,” he said.

Asked whether he was bullish on Europe, he said that he would characterize his view as “optimistic” rather than bullish.

“In many parts of the world, governments are highly involved in the market whether it’s the Fed here or the European Central Bank in Europe,” he said.

“With such heavy-handed interventions in the monetary and fiscal policies, you never know how far governments will go, what impact a change in policy may have on the market and what to expect.

“But I am optimistic about Europe, in part because the valuations in this market are so much better than in the U.S.

“This note should be a good addition to the international exposure of the portfolio.”

Goldman Sachs & Co. LLC is the agent.

The notes are guaranteed by Goldman Sachs Group, Inc.

The notes priced on April 15 and settled on Thursday.

The Cusip number is 40057FYU2.

© 2015 Prospect News.
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