GS Finance’s $9.89 million autocall trigger PLUS on Nasdaq-100 show good trade entry

By Emma Trincal

New York, March 17 – GS Finance Corp.’s $9.89 million of 0% autocallable dual directional trigger Performance Leveraged Upside Securities due March 14, 2024 linked to the Nasdaq-100 index debuted at a good entry point as the underlying has dropped from previous highs, a financial adviser said.

The notes will be called at par plus 12% if the index closes at or above its initial level on March 20, 2023, according to a 424B2 with the Securities and Exchange Commission.

If the final index level is greater than or equal to the initial index level, the payout at maturity will be par of $10 plus 125% of the index return. If the index declines by 15% or less, the payout will be par plus the absolute value of the index return. If the index declines by more than 15%, investors will lose 1% for every 1% that the index declines from its initial level.

Entry point

“Given the fact that the Nasdaq is in correction mode – even touching bear market territory lately – I think you’re getting a very good entry point for an instrument like this,” said Jeff Pietsch, founder of Capital Advisors 360.

The Nasdaq-100 index is down 15% year to date. On March 14, it was 22.3% off its 52-week high of Nov. 22, technically meeting the definition of a bear market.

“You have the equity risk. But it feels like a hybrid income/equity note based on the payout structure, specifically the call premium,” he added.

Call premium

The autocall scenario, which caps the upside at 12%, was attractive, he noted.

“With all the uncertainties in the world, it’s better to take the 12% than to hope for more,” he said.

“We still expect a flattish environment in the next one to two years. If we’re right and the market turns out to be flattish, I would take 12% any day of the week.”

The note with its single call observation after one year is not designed for bullish investors as the 12% call premium would limit the upside. But the fixed payment was what gave the note its income characteristic, he said.

“If I want exposure to the index, I’d get it somewhere else.”

The second payout scenario at maturity requires that the index is negative at the end of the first year, he noted, otherwise the note would have been called.

“You now have one year to go back up. There is equity risk of course but you get the accelerator, and you have no cap.”

Either way the two positive outcomes, whether after one year or after two, were attractive.

Barrier

Pietsch examined the risk associated with the note. While losing some principal can always happen with equity-linked products, he found the risk relatively moderate given that the index has already declined by 15%.

“Markets tend to go up after they go down,” he said.

The 85% barrier appeared adequate for the same reason.

“The protection feels reasonable to me. If this note had come up in November or December when the Nasdaq was at its peak, I would have had a very different opinion. But in a post-correction environment, it makes sense,” he said.

Pietsch added that the notes could be a good fit in the portfolio of some clients with a specific risk profile.

“Because of this income quality to it, it looks attractive for the income allocation of a diversified portfolio for a moderate to growth investor,” he said.

Two different outcomes

Steve Doucette, financial adviser at Proctor Financial, said the two different payout scenarios (call premium and leveraged participation at maturity) complicated the decision-making process for advisers.

“The good thing is we’re down 20%. With the 15%, you’re basically getting a 35% barrier,” he said.

“But with this war who knows what’s going to happen in the next two years.

“You get all these moving parts in the structure, one return in one year, another at maturity.”

For the autocall scenario, the risk was on the upside.

“The Nasdaq could be down for a little while then come screaming back up. If you want to use this note for your equity allocation you may have to give up some of the upside,” he said.

He then commented on the leverage setting at maturity. Depending on the index performance, the accelerated return and the uncapped exposure may be of little help, he said.

“Now you’re starting from a negative point, and you only have one year. Leverage is beautiful when you have a decent return. But that’s not always the case. You could have a note with 2x leverage, have the index up 2% at maturity and get 4%. Big deal,” he said.

Decision-process

The benefits of the note would be easier to assess if one had a specific objective.

“This is one of those where you really need to know what you are shooting for because you have income and you have growth in the same package,” he said.

“Are you hoping to capture the 12%?

“Are you trying to maximize the upside hoping the index will be negative on the call date so you can ride the notes and get your leverage a year later?

“It’s nice to get 12%, but if you’re wrong, if you miss the call and hold the notes until the end, now you have unlimited downside.

“A 15% barrier on the Nasdaq isn’t much. You could lose a lot of money, a lot more than 15%.”

One way to improve the size of the barrier would be to eliminate the absolute return feature, he said.

“If I could get a 30% to 40% barrier it would be very different,” he said.

No conviction

For Doucette, the different outcomes offered by the structure made an investment decision difficult to make.

“You have the call, the downside scenario, the absolute return, the leverage, a cap after one year, no cap at maturity. I have to say it’s an interesting note. But there’s so much uncertainty right now in the world, I’m not sure how I would assess this one. It’s a tough call,” he said.

“We know the outcome for the payout. But we don’t know which way the market is going and how fast it’s going in either direction.

As always, investment decisions are about timing, he said.

“We all agree that long-term, the market goes up. But in the meantime, it’s going up, it’s going down. If you get caught at the wrong time, the leverage doesn’t really work for you.

“There are too many moving parts in this thing. I can’t really have a strong conviction,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent. Morgan Stanley Wealth Management is handling distribution.

The notes settled on Wednesday.

The Cusip number is 46652Y789.

The fee is 2.5%.

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