GS Finance’s $17.81 million autocallables on S&P 500 to outperform over the short term only

By Emma Trincal

New York, May 19 – GS Finance Corp.’s $17.81 million of 0% autocallable index-linked notes due May 13, 2027 linked to the S&P 500 index provide a number of attractive terms, but the real benefit for investors comes from the automatic call provision after one year, a financial adviser said.

The notes will be called at par plus a call premium of 13.25% if the index closes at or above its initial level on May 9, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any index gain. If the index falls, the payout will be par.

All in the call

Steve Doucette, financial adviser at Proctor Financial, said the notes looked attractive at first glance. But investors had to first run various scenarios and check the possible outcomes.

“You can outperform on both ends. Obviously, you outperform 100% of the time on the downside with the full protection,” he said.

“On the upside though it’s a little bit trickier. You’ll only beat the index if it’s up by less than 13.5% in the first year. Otherwise, you’re just long the index.

“So, it’s really only during that first one-year period that you have a shot at generating excess return,” he said, adding that in order to do that, the index needs to remain contained within the 0% to 13.5% range.

“We’re getting 4% intraday moves in this market today. How do you have the confidence that you’ll fall within that range a year from now?”

In the absence of a call and if the index finishes positive, investors lose the benefits of the structure, he said.

“You don’t get called, you’re one-for-one on the upside. It limits your liquidity for four more years without any chance to outperform in that direction,” he said.

PPN’s tax implications

Furthermore, the 100% principal-protection can raise some tax issues, he noted.

“We try to avoid principal protected notes because your gains become subject to income tax,” he said.

“You don’t get the benefit of long-term capital gains. That’s a problem for a lot of clients,” he said.

“Besides I’m not sure you need the full downside protection over five years especially with the S&P already trading down so much this year.”

Reshuffling the deal

Doucette said he would restructure the notes to improve the odds of excess returns and also to enhance the tax treatment for his clients.

“I would probably use a 5% buffer or a 10% barrier for the downside so that I can try to catch some leverage on the upside, while maintaining the no-cap,” he said.

“If the call had to be there, I would try to push the premium higher, from 13% to 20% for instance. That way, I get some value from the long-term leveraged bet but also from the short-term play if I get called.”

Pricing

A buysider said he was familiar with the structure.

“I’ve seen this note before. Citi is also marketing it aggressively. The only way you’re not getting that 13% is if the index is below zero in one year,” he said.

Finding the terms attractive, he explained how the issuer priced the notes.

“It’s really based on their options pricing model. They look at the current price, they look at the vol., they look at the forwards. And they determine the hedging costs,” he said.

“Their model probably tells them that a year from now, the index will be a lot higher than the call premium based on today’s big drawdown. If they can hedge it, they’ll do it and squeeze the best terms.”

Opportunity cost

For investors, the risk is the opportunity cost.

“If the S&P a year from now is up 25% and you, the investor, only get 13%, that’s your cost,” he said.

For the bank the advantage of including an autocall after one year was to make the hedge less expensive, he said.

“You can’t predict the future cost of hedging, and five years out you can’t hedge out. They hedge on a rolling basis,” he said.

This buysider said he also liked the long tenor.

“If you miss the one-year call, you have four years to see the market rebound,” he said.

The principal protection was a good selling point, he said, even if the odds of a negative performance at the end of five years were low based on data for five-year rolling periods.

“Those probabilities are much greater over a short-term period like the one year, which allows them to give you that double-digit premium,” he added.

“We like this note a lot. We’ll show it to our folks.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent with UBS Financial Services Inc. as selling agent.

The notes settled on May 12.

The Cusip number is 40057LYB1.

The fee is 2.5%.

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