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Published on 3/22/2016 in the Prospect News Structured Products Daily.

GS Finance’s leveraged buffered notes linked to Euro Stoxx may appeal to mild bulls, skeptics

By Emma Trincal

New York, March 23 – GS Finance Corp.’s 0% 24- to 27-month leveraged buffered notes linked to the Euro Stoxx 50 index may attract investors who lack a strong bullish outlook on European stocks as well as advisers who tend to shy away from structured notes in general, according to financial advisers.

If the index return is positive, the payout at maturity will be par plus triple the index return, subject to a 24.6% to 28.8% cap, according to a 424B2 filed with the Securities and Exchange Commission. The exact cap will be set at pricing.

Investors will receive par if the index declines by 10% or less and will lose 1.1111% for every 1% that the index declines beyond 10%.

Flattish

“Honestly, if you’re going to invest in this market, it would probably be a better scenario to use this rather than the index itself,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“The Euro Stoxx 50 hasn’t moved up very much. It could easily stay flat for some time.”

The index, as represented by the SPDR Euro Stoxx 50 exchange-trade fund, bottomed at $26 in 2012 in the post-crisis era. It peaked at $44 in June 2014 and hit a recent low at $30, he noted. The ETF closed at $33.40 on Tuesday.

Assuming a 25% cap, the fund would have to trade between about $30 (to avoid falling below the buffer threshold) and $42 (in order not to hit the cap), he said.

Depending on the final terms, the index would have to rise about 4% a year to lift the return to the cap level.

“The leverage and the buffer are pretty reasonable,” he said.

“The buffer even with the 1.11 multiple is better than a barrier. At least you’re still getting a 10% protection.

“This index has been in a short-term downtrend in the past 22 months. If you think it’s going to trade range bound, then it’s an attractive way to invest in this asset class.”

Outlook

But only for those who hold such view. Chisholm said he is not one of them.

“The Euro Stoxx is still in a downtrend. I’m not all that positive on Europe,” he said.

“They have some economic challenges, and I don’t see them escaping these in the next two years.

“The European stock market is still not great despite all the efforts by the European Central Bank to promote asset growth. It hasn’t quite happened.”

For investors slightly bullish on the euro zone, however, the notes offer a good option as the leverage can boost returns and help the product outperform the benchmark.

“I don’t think Europe has a great potential. But if you do, then it’s an attractive structure,” he said.

“As an allocation to Europe, this is a good substitute to the index.”

Buffer

Jonathan Tiemann, president of Tiemann Investment Advisors, LLC, emphasized the value of the downside buffer.

“To get really hurt on the downside you would have to see a severe downdraft. If this index is down 20% over the course of two years, you only lose 11%,” he said.

“The downside risk is very much limited. It’s not bad.”

The limitations on the upside could be a problem for bulls, but the note is primarily designed for more agnostic investors whose return expectations are modest, he noted.

“If you think the Euro Stoxx will likely bump along and be up a little bit, this might be a kind of interesting way to express that view,” he said.

“The upside is capped, which is how you’re paying for the leverage and the protection. But if you’re right, if the market is moving sideways, the notes can give you attractive results.”

Less to say no to

Tiemann said that he is usually skeptical when it comes to structured investments. But he added that this particular product has the potential to ease some of his concerns, which are credit risk and reduced liquidity in the secondary market.

“You always have to think of credit risk when you look at a structured note. And you can’t have any expectation of liquidity,” he said.

“These are my usual caveats. But the terms of this note are pretty OK in relation to these caveats.

“You get high credit quality and a short tenor. These things help.

“I wouldn’t want to be stuck with this for five years, but two ... I can imagine a scenario where I would be willing to.”

Goldman Sachs & Co. is the agent.

The notes are guaranteed by Goldman Sachs Group, Inc.


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