GS Finance’s bearish barrier early redeemable notes on S&P offer protection, possible low gain

By Emma Trincal

New York, March 21 – GS Finance Corp. plans to price 0% bearish barrier early redeemable market-linked notes with daily barrier observation due March 26, 2020 linked to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

A barrier event will occur if the index’s closing level is less than 85% of the initial index level on any trading day during the life of the notes.

If a barrier event occurs, the notes will be redeemed and holders will receive par plus 0.5%.

If a barrier event has not occurred and the final index level is greater than or equal to the initial index level, the payout at maturity will be par plus 0.5%.

If the final index level is less than the initial index level by up to 15%, the payout will be par plus the absolute value of the index return.

If the final index level is less than the initial level by more than 15%, the payout will be par plus 0.5%.

Best scenario

The absolute return payout offers the most desirable outcome, said a market participant. If the index finishes negative but by less than 15%, investors may expect to gain up to 15%. But they may earn much less depending on how much the index falls at maturity.

The market risk is eliminated via the principal protection.

“There’s no way to lose money. You will at least get 0.5%,” he said.

No loss, no gains

The drawback of the structure is the high probability of a mediocre outcome, he added.

In all likelihood, investors will receive par plus 0.5%, which is lower than a savings account rate.

This less-than-optimal outcome will occur in two cases: a correction or bear market occurring at any time during the life of the notes – as long as the decline exceeds 15% – or a bull market scenario if the index finishes positive.

In the former occurrence, the notes will be redeemed early, cutting the duration of the investment to less than one year.

“Optically I could earn as much as 15%, but the odds of that are very low,” this market participant noted.

“There is a very good chance to make 0.5% whether I make it in a month or in a year.”

Early redemption

The early redemption feature is a positive for investors.

If the notes are redeemed after only one month, the 0.5% fixed payout becomes a 6% annualized rate of return.

As time elapses, such profit on an annualized basis declines rapidly. A breach after two months generates the equivalent of a 3% gain, and after three months, a 1.5% gain.

Not bullish...

Bears buying the notes would be better off if a selloff occurred sooner rather than later. In contrast, if the S&P 500 is up at maturity, investors will have had to wait an entire year in order to collect a very small payout.

This is why the notes are called “bearish,” explained the market participant.

“They had to call it bearish because you really don’t want the market to be bullish,” he said.

That’s because a bull market for noteholders translates into the smallest return over the longest holding period.

In theory, things would be just as bad if the index declined by less than 0.5% or by more than 15% at maturity. These scenarios would produce the same result as a bull market, but the odds of them occurring are small.

...but not too bearish

The notes are bearish, but the bearishness is muted, he noted.

“It’s almost a low-volatility assumption investors have to make. While you may have a negative bias because you believe the market is overbought, you don’t expect a huge bear market. You’re bearish but in a kind of drip, drip fashion, not in a volatility spike kind of way.”

Upside risk

The view and the limited chance of high gains limit the appeal to a very narrow group of investors.

A financial adviser who is bullish for the short term said he would pass on the deal.

“Generally I do appreciate that type of note for the principal protection,” said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

“But I’m on the fence on this one,” adding that his short-term outlook has recently changed.

“Six or eight weeks ago, I was not ruling out some sort of pullback. At this point, I continue to anticipate a pullback, but not for a couple of years.

“I think we’re getting into a flattening period, in which case it’s very probable that this note will give you almost nothing a year from today.”

The fact that any positive performance in the S&P 500 would “punish” investors with the equivalent of a 0.5% cap was a drawback for this adviser.

“The risk is on the upside on this one. I’m not willing to take a chance.”

The notes will be guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC and UBS Financial Services Inc. are the agents.

The notes were expected to price Thursday and settle Monday.

The Cusip number is 40056F4J1.

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