GS Finance’s autocallable notes on Russell 2000 to generate income with growth potential

By Emma Trincal

New York, Dec. 23 – GS Finance Corp.’s 0% autocallable index-linked notes due Jan. 4, 2028 tied to the Russell 2000 index provide an “income strategy” to investors while allowing them to participate in the index’s growth, a financial adviser said.

The notes will be called at par plus a 12.4% annualized call premium if the index closes at or above its initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above its initial level, the payout at maturity will be the greater of 25% and the index gain.

If the index declines by up to 25%, the payout will be par. Otherwise, investors will lose 1% for each 1% decline beyond 25%.

Market conditions

The call premium amount and the fact that investors may cumulate the payment if called at a later date were attractive features, said Jeff Pietsch, founder of Capital Advisors 360.

“With higher yields and increased volatility, issuers are now able to offer higher premium. That 12.4% call premium looks like a very hefty rate of return,” he said.

Even though the security technically pays a premium, not a coupon, the notes could be used as part of an “income strategy,” he said.

Dividends

The issuer used the dividends to finance the terms as it is the case with most structured notes.

“You’ll lose the dividends. But the Russell doesn’t pay a huge dividend yield,” he said.

The index yields 1.3%.

“The opportunity cost is limited because you’re not giving up a lot of yield in the small-cap space,” he said.

Downside exposure

While the principal remained at risk, the structure offered some defensive features.

“The 75% barrier is reasonable. Over a five-year window, the risk is pretty low,” he said.

Another mechanism limiting the downside risk was the annual autocall.

“The odds of going through the five-year period without at least one autocall are very slim. If it doesn’t happen, the barrier comes into play at maturity.

“You still have market risk exposure. But the odds of losing money are quite low,” he said.

Pietsch said the notes could be seen as a “quasi-income play,” with some equity risk attached to it.

“But the risk is minimal.

“Chances are you’re not going to have two back-to-back negative years let alone three or four. It would be a multi-year black swan. That’s very unlikely,” he said.

Yield play

The cumulative premium made the notes all the more attractive to income investors.

A missed call on the first year followed by an automatic call event on the second year would yield a return of 24.8% upon the early redemption.

“For clients looking for yield, I can see this note as an enhanced income strategy overlay,” he said.

Income investors seek more conservative structures. The note fits the bill in more ways than one.

“The risk is limited,” he said.

The barrier at maturity and the multiple call observations each year are risk mitigating factors, which are embedded in the structure. But the stock market itself added another layer of safety.

“Even if we have a couple of bad years ahead of us, the market is already down 25%. I think the odds are in your favor in this deal,” he said.

Unlimited upside

Pietsch also liked the return potential. Unlike most income plays, investors were able to participate in the upside in the absence of a call.

“I like the payout at maturity too. You’re guaranteed a minimum return of 25%. The fact that you don’t get a cap on it is attractive. It’s a good tradeoff.”

The risk-adjusted return met the basic requirements of equity investing.

“When you take on some equity risk, it’s nice to know you can get an equity return,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes will price on Dec. 28 and settle on Dec. 30.

The Cusip number is 40057PBC5.

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