GS Finance’s contingent coupon autocalls on silver, oil ETFs bring value amid virus fears

By Emma Trincal

New York, Feb. 19 – GS Finance Corp.’s autocallable contingent coupon ETF-linked notes due Nov. 28, 2023 linked to the iShares Silver Trust and the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund offer good entry prices and a reasonable barrier for investors willing to invest in the two volatile underliers, sources said.

The notes will pay a contingent monthly coupon at an annualized rate of 8.6% if each asset closes at or above its coupon trigger, 70% of its initial level, on any monthly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called if each underlier closes at or above its initial level on any observation date after six months.

If the notes are not called and each underlier closes at or above its trigger, 70% of its initial level, the payout at maturity will be par plus the final coupon.

Otherwise, investors will lose 1% for every 1% decline of the lesser performing underlier.

Cheap oil

“The chances of getting paid are pretty good given the current levels of oil and also silver,” said Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments.

The SPDR S&P Oil & Gas ETF is trading close to its 20-year lows, he said.

“You own a very depressed asset because of the coronavirus outbreak, which has encouraged people to sell even big names like Exxon, Chevron, ConocoPhillips, Halliburton and many others,” he said.

“It’s certainly very worthwhile to buy at these levels. It provides investors with a margin of safety while you’re positioning yourself for a rebound.”

Silver and inflation

Unlike oil stocks, share prices of the silver ETF have increased but still remain attractive from a value standpoint, he noted.

“Silver has started to move up but if you look back over a longer period, it’s still relatively low,” he said.

One of the most likely factors behind a stronger rally in silver is inflation, he said.

“Right now, people are buying precious metals out of this virus scare. But it’s not the main driver. Inflation and a lower dollar will have a much more significant impact than the flight to safety,” he said.

“The Chinese government has demonstrated that it’s willing to spend a lot of money to stimulate the economy, so even if China slows down, inflation is likely to pick up because the government will run an inflationary policy to boost the economy.”

Barrier

Kaplan said the barrier at maturity was acceptable.

“70% seems very good especially with XOP already so low and silver still close to its lowest levels,” he said.

The SPDR S&P Oil & Gas Exploration & Production ETF is listed on the NYSE Arca under the ticker “XOP.”

“The chance of being called away is pretty high, but it’s not a bad thing since you get at least the first six months to generate a positive return.”

Matt Rosenberg, head of trading and strategic initiatives at Halo Investing, said that investors should be cautious about the two underliers.

Caution

“These are two very volatile funds,” he said.

“I guess one could argue that the 30% protection is fair and that oil is at the low end of its range.

“If you expect the note to call early, it may be a reason to overlook the risk. But I personally would be more cautious.

“While there are reasons to be bullish on silver, the outlook for oil is not that bright as a result of the impact of the coronavirus outbreak on China.

“An economic slowdown in China will reduce global demand for oil.”

The prospects for silver and precious metals are more bullish.

“People are buying cryptocurrencies, gold, silver in a flight to safety. Yields are very low so not getting a yield on metals is no longer a good reason to avoid the asset class,” he said.

Tactical bets

“Precious metals are becoming more attractive.”

The use of the two underlying funds reflects investors’ quest for hedges as well as catalyst-driven trades.

“We do see a pickup in interest in silver, gold and oil,” he said.

“People buy structured notes on these assets as tactical plays.

“As oil prices are dropping, yields on these income products become more compelling.

“You can get paid a coupon even if the asset price doesn’t go up.

“Obviously there is downside risk, but the 30% protection is designed to insulate you from losses.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes will settle on Feb. 24.

The Cusip number is 40056YHZ0.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.