GS Finance’s $4.89 million notes on S&P 500 offer income and growth with innovative terms

By Emma Trincal

New York, Nov. 9 – GS Finance Corp.’s $4.89 million of 0% index-linked notes due Nov. 4, 2027 linked to the performance of the S&P 500 index may provide either income or participation through an innovative structure combining the use of an American barrier on the first year and a bonus at maturity.

The term “American” designates a barrier that can be struck during the life of a note and not just at maturity as is the case with most barriers used in structured notes, which are termed “European.”

The notes will pay a contingent coupon of 9% for the first year only, payable monthly, if the index closes at or above 85% of its initial level on every trading day during the relevant observation period, according to a 424B2 filing with the Securities and Exchange Commission.

If every coupon is paid, signifying that the index has closed at or above 85% of its initial level on every trading day for the first year, the notes will be automatically called at par plus the final coupon.

If the notes have not been called, the payout at maturity will be par plus the sum of the index return and 15%.

Range-bound

“If you buy it, you think the S&P will be range-bound or do nothing for the first year. That’s your belief with this note,” said Steve Doucette, financial adviser at Proctor Financial.

“The 9% coupon may look nice. But if we go into a bear market, you’re not going to get much income. You’ll have to wait another three years to generate something from the index return.”

Bonus

Doucette was not impressed by the payout at maturity.

“The extra 15% is just a bump. It’s not leverage. And that’s four years out. I can’t really get excited about a 15% bump over four years. That’s 3.5% a year. If I lock myself up for four years, why would I limit myself to that?” he said.

If the automatic call does not occur, the outcome would not be favorable to investors, he added.

“There’s not enough upside.”

Leverage preferred

Instead, Doucette said he would rather have 115% in leverage. Over a four-year term, the leveraged payout was likely to outpace that of the note.

He gave some examples.

If the index was up 20% at maturity, the 115% leverage would generate a 38% gain versus 35% from the note.

A higher return, for instance a 30% increase in the S&P, would accentuate the difference between the two payouts: the leverage would generate a 50% gain versus 45% with the note.

Modest yield

“There’s nothing in this note that I find attractive. Nothing that really makes sense to me,” he said.

“There are too many moving parts and not enough upside at the end.

“And who’s going to take an American barrier for 9%? You can get 9% from a high-yield fund.”

Even a typical autocallable note with a European barrier could generate a contingent coupon in the 8% to 9% range, he added.

“I suppose it was a one-off designed for a particular client with their own view on the market,” he said.

Unpredictability

Matt Medeiros, president and chief executive of the Institute for Wealth Management, objected to the terms conditioning the coupon payment.

“I’m not a fan of this security,” he said.

“As an income note, there are too many inconsistencies in it. I don’t have the predictability I need for my income stream.”

Moreover, Medeiros was relatively cautious about the market.

“The S&P has been the darling of the year. But its growth is coming from seven stocks whose performance is related to AI,” he said.

“If there’s a hiccup in the technology sector, similar to what we saw with the dot.com bubble in 2000, then there is very little to support the continued growth of the benchmark at this time.”

Buffer

The payout at maturity was not his main concern.

“When I buy a note, I want the index return with a good downside protection. That’s my objective.

“If I can get the kicker at the end and the buffer, it’s attractive to me. And over a four-year period, the 15% buffer is reasonable. So I’m OK with that,” he said.

Special situation

The less attractive part was the uncertainty around the interest rate payments as the daily monitoring of the barrier added a significant level of risk.

“A 15% drop on any trading day and on any given month is certainly probable. That means I can’t count on the coupon.

“And since the S&P 500 can become very volatile given the weight of a few mega cap stocks in it, I would not be comfortable with the structure.

“This note has multiple triggers. It was probably designed for an institution or a situation. But I wouldn’t consider it for my portfolio,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on Nov. 3.

The Cusip number is 40057WRP4.

The fee is 0%.

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