GS Finance’s $14.29 million jump autocalls on indexes offer competitive income, advisers say

By Emma Trincal

New York, Jan. 25 – GS Finance Corp.’s $14.29 million of 0% jump securities with autocallable feature due Jan. 25, 2029 linked to the worst performing of the S&P 500 index, the Nikkei 225 index and the Euro Stoxx 50 index provide investors with a mid-double digit call premium allowing for cumulative gains. As a result, the annualized return remains the same regardless of when the notes are called if they are, advisers noted. Moreover, the worst-of may delay the occurrence of the call, giving noteholders a chance to get paid for a longer period of time.

Those features, advisers said, make the investment attractive for income-seekers.

The securities will be called automatically starting Jan. 29, 2025 at par plus a call premium of 14.5% per year if the level of each underlying index is greater than or equal to its initial level on any quarterly call determination date, according to a 424B2 filing with the Securities and Exchange Commission.

At maturity the payout will be par plus 72.5% if the worst performing index finishes above its initial level. If the worst performer declines but finishes at or above its 80% downside threshold level, the payout will be par. Otherwise, investors will be fully exposed to the decline of the worst performing index.

Snowballs

Steve Doucette, financial adviser at Proctor Financial, said he liked the notes.

“These snowballs are really great. We did one recently. These things almost look too good to be true.,” he said.

Snowballs are autocallables providing payment upon the early redemption only. They differ from the traditional autocall (Phoenix) in that the underlying needs to satisfy a higher threshold: the call occurs above initial price, not above barrier level.

To compensate investors, a call premium in a snowball is usually greater than the contingent coupon in a classic autocall. In addition, the call premium is cumulative. Any unpaid premium will be collected upon a call occurring at a later date.

Some Phoenix autocalls allow for the cumulative payment when they offer a so-called memory coupon. But such feature is the exception, not the norm.

Worst-of benefit

The call protection and worst-of payout contribute to attenuate the reinvestment risk, said Doucette.

“You get a one-year no-call, and you may just continue to hold it.

“Since you need those three indices to be up, it might not be called for years.

“The odds of collecting are pretty good,” he said.

In addition, the three indexes mix could be useful for asset allocators, he said.

“You can use this in your portfolio as part of the global asset allocation, five years out,” he said.

Potential alpha

But perhaps the most attractive feature was the cumulative nature of the premium.

“What’s neat about those snowballs is that you capture the potential to get the full return in the future. You kind of lock in the 14.5% premium,” he said.

“I mean what are the odds that you’re never going to get called in the next five years?

“You can significantly outperform.”

Only a very bullish investor would shy away from this investment, he said.

“The risk is that the market continues to go through the roof for the next five years. Yes in that case you can underperform. But by how much would you underperform over that timeframe? Maybe not by a whole lot or maybe not at all,” he said.

The 80% barrier at maturity was acceptable for a longer-dated note, he said.

“Five years out. I don’t know if I need to lower the barrier much.

“I really like this note,” he said.

Barrier

Scott Cramer, president of Cramer & Rauchegger, said the value of the investments depended on investors’ objectives.

“I usually don’t like worst-of especially when the indices are not correlated,” he said.

“These may be a little bit correlated because they’re all equity indices. But they’re going to behave differently based on what’s going on in these countries.”

The donwisde risk at maturity was partially offset by the term and barrier level.

“I do think the barrier is generous. On a five year, I don’t think you’re going to get hurt. It’s an adequate protection level,” he said.

Long tenor

Cramer said the notes may not meet the criteria of an equity replacement. But as an income instrument, the structure and return potential were attractive.

“I don’t think I’m getting compensated enough if I invest in this for growth especially given the illiquidity associated with a five-year tenor,” he said.

“You may or may not get called. The three indices need to be above their initial price. There’s a reason you’re getting 14%.”

Income play

Another perspective was to view the notes as an incomre-oriented investment.

“If I don’t think in terms of growh, the 14.5% return is very attractive. Interest rates are probably going down. This may end up being a better coupon than what it looks like today,” he said.

The worst-of may be favorable to investors as it reduces the chances of a call, potentially extending the length of the holding period.

“As an income investor, if I was to get 14.5% a year for five years, that would be a darn good return. It would outperform everything I guess.

“So from that point of view, I would be very willing to take the equity risk,” he said.

A very bullish investor may worry about underperforming the market, a concern known as “FOMO” for “fear of missing out,” in market jargon.

“There’s no FOMO if you’re an income investor. What you’re getting here is a very generous income,” he said.

The reinvestment risk was to be considered.

“Chances are you’re not going to last five years. But since I can cumulate the premium as long as I’m holding the notes, I’m still getting my 14.5% a year.

“You just can’t think about it in terms of growth. There’s a hybrid aspect to this note. But it definitely works well if you’re looking for income,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter. Morgan Stanley & Co. LLC is acting as the dealer.

The notes settled on Thursday.

The Cusip number is 40057XXM2.

The fee is 3.25%.

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