GS Finance’s $2.51 million trigger notes on S&P 500 offer novel structure with absolute return

By Emma Trincal

New York, Sept. 6 – GS Finance Corp.’s $2.51 million of 0% absolute return trigger index-linked notes due Dec. 5, 2025 linked to the S&P 500 index offer a dual directional play on the market with the guarantee of receiving more than one’s principal at maturity.

A barrier event will occur if the index closing level has increased or decreased from its initial level by more than 21% any day during the life of the notes, according to a 424B2 filing with the Securities and Exchange Commission.

If a barrier event has occurred, the payout at maturity will be par plus 9%.

If a barrier event has not occurred, the payout at maturity will be par plus the absolute value of the index return, subject to a minimum payment of par plus 9%.

Opportunity cost

“I kind of like it. If it was longer-dated, I would be concerned. But not with this tenor,” said Samuel Rosenberg, managing partner at hedge fund Lutetia Capital.

The duration of the notes is about 27 months.

Investors in the product are presumably uncertain about the market.

“The future of the economy is still unclear. Are we going to have a recession or a correction? Will the soft-landing scenario prevail? That’s the debate going on right now,” he said.

“As long as the performance stays relatively muted, you’re going to benefit by getting the absolute return either from the downside or the upside. If the performance goes beyond any of the two barriers, you still get a coupon of 9%. That’s a little bit less than 4% a year. It’s not much but it’s not zero.”

The main risk was on the upside.

“Of course, if the market goes up tremendously, you’ll have a significant loss of opportunity. On the other hand, if we go through a recession, you get your principal back plus 9%,” he said.

The notes fit a very specific profile.

“You’re not shooting for the moon. It’s for people who don’t know what direction the market is going to be.”

The 9% return is only the minimum payout if there is barrier breach. In theory, investors could get less than 9%. They may get a 0% return, he noted.

“What looks like the worst scenario is if the market is flat. But it wouldn’t be worse than if you had invested directly in the S&P. In that scenario, the opportunity loss is not that bad.

“The real opportunity loss scenario is if we have a tremendous rally, and you end up with less than 4% a year.”

Long straddle

A market participant said the structure was intriguing.

“If you touch the barrier up or down any time, you get 109%. Worst outcome: the market doesn’t move. You get 100%. Best outcome: you pocket the 21% top return,” he said.

If he had to replicate the trade with options, it would be the equivalent of a “long straddle, which would be capped and floored,” he said.

A long straddle is an options strategy that consists of buying a call and a put at the same strike price, on the same underlying asset and with the same expiration date.

“You’re long a call strike 100 and long a put strike 100,” he said.

Those two options provide the one-to-one absolute return for each point of growth or decline from the initial level, he added.

In order to trigger the American barrier at 79 (the 21% decline) and 121 (the 21% increase), another option leg consists of adding two knock-out barriers struck at 79 and 121. The breach of any of such barriers would cause the long put and long call options to expire worthless, he said.

“That puts an end to the absolute return participation,” he said.

The 9% guaranteed return is provided through a rebate added to each of the knock-outs.

A rebate is a coupon offered if the knock-out barrier is breached.

Cash alternative

“It looks very attractive to me. Yes, 109% is less than what you would get at the bank, and you won’t get anything if the index doesn’t move,” he said.

“It’s a gamble. But it’s still a reasonable gamble.

“You think the market is likely to move and to stay within the 21% range up or down. It’s like a 50/50 bet. You may not get as much as cash if one of the barriers is breached. But you have the potential to get as much as 21% in positive return regardless of the direction of the market.

“That’s not a bad trade.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes settled on Aug. 31.

The Cusip number is 40057TVG6.

The fee is 2.4%.

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