GS Finance’s callable contingent coupon notes on Nasdaq, Russell, S&P offer lower entry price

By Emma Trincal

New York, Sept. 9 – GS Finance Corp.’s callable contingent coupon index-linked notes due March 13, 2023 linked to the least performing of the S&P 500 index, Russell 2000 index and Nasdaq-100 index provide a double-digit contingent coupon with barrier protection amid a market pullback.

The sell-off provides a better entry point, hence, some margin of safety on the downside, sources said.

As the market recovered on Wednesday after two days of heavy losses, it remained unclear if stock prices are set to drop further or if the recent pullback was just a pause in the recovery rally.

The notes will pay a contingent monthly coupon at an annualized rate of 10.5% if each index closes at or above its 70% coupon trigger level on the determination date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes may be called at par plus any contingent coupon due at the issuer’s option on any coupon payment date after six months.

Unless any index finishes below its trigger level, 60% of its initial level, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the least-performing index.

Buying lower

“It’s good to have this 30% barrier given the pullback we just had,” said Tom Balcom, founder of 1650 Wealth Management.

“The Nasdaq is already down more than 8% from its high of last week. That gives you a little bit of a cushion, a lower entry price, which is good.”

Balcom said he liked the double-digit contingent coupon on indexes.

“It’s a nice yield. It’s not a fixed-income substitute obviously. The coupon is juicy because you’re taking on risk. But if you’re comfortable with this barrier level, it’s definitely a very attractive structure.”

Discretionary call

Another yield enhancement factor was the non-automatic nature of the call option.

“It’s a discretionary call and I would say that’s the risk. But you have a six-month no-call. So, if you only get 5.25% in six-months, that’s a pretty healthy return...it’s still an equity type of return,” he said.

While there is always a chance to see U.S. major indexes falling further, the coupon offered sufficient compensation for such risk, he said.

“For any investor there’s always that risk. How do you time your entry perfectly? You don’t. That’s why you want the downside protection.”

Correlations

The choice of the indexes mitigated some of the risks associated with the use of a worst-of payout, a market participant said.

“You’re not taking much dispersion risk because the S&P, Russell and Nasdaq have historically been pretty much correlated,” he said.

“Going forward you never know of course. But it’s not as if you were putting together the Dow, the Euro Stoxx 50 and the Hang Seng.

“I think it’s an interesting deal. 10.5% is very attractive.”

Bearish outlook

A buysider did not agree and found the product relatively risky.

“Any of those indices can drop more than 40% in a two-and-a-half-year term. There’s plenty of time for the market to drop and not necessarily enough time to recover,” he said.

He pointed to the 31-month dot.com bear market from March 2000 to October 2002, which led to a 49% drop in the S&P 500 index.

“We’re only at the beginning of a major unwind. We’ve broken all kinds of record highs. The market was extremely overvalued.

“The 10.5% return is not enough to compensate anyone for the risk.

“If a bear market started on Sept. 2 when the Nasdaq peaked, I can easily see another two-and-a-half years of a bear market.

“You’re not even guaranteed to get 10.5%. You have to be above the 70% level. There are just too many risks.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes will settle on Sept. 11.

The Cusip number is 40057CV24.

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