GS Finance’s $13.5 million step down autocalls on Russell 2000 seen as equity substitute

By Emma Trincal

New York, Nov. 10 – GS Finance Corp.’s $13.5 million of 0% step down trigger autocallable notes due Nov. 9, 2027 linked to the performance of the Russell 2000 index are better positioned in the equity portion of the portfolio rather than as a bond substitute, an adviser said, citing the equity-like return offered and the lack of periodical income.

The notes will be called at par plus an annualized call premium of 12.64% if the index closes at or above its initial level on any quarterly observation date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes at or above its 75% downside threshold, the payout at maturity will be par plus 63.2%.

Otherwise, investors will lose 1% for every 1% decline of the index from initial level.

Zero coupon

“Is it fixed-income replacement in your portfolio? Not really. You get no coupon. It’s more equity-like except that it may underperform the market if we have a big rebound,” said Steve Doucette, financial adviser at Proctor Financial.

The tenor was another drawback.

“I don’t like locking my money out for five years. A three-year note would be more appealing even though the call may shorten the duration to one or two years. But you don’t know that,” he said.

Snowball

The structure offered a number of attractive features, he said.

The optimal scenario is the call paying 12.64% a year, he said.

Thanks to the “snowball,” the timing of the call had no impact on the overall return.

“You can miss a call and get called later. Your premium is the same. If you buy the note, you’re hoping the market is up in the next year or two. But if you’re wrong and if the notes mature, you can still pocket the full 63% premium,” he said.

Step down, no-call

The “step-down” feature lowering the call threshold at maturity from initial price to the 75% barrier threshold was another attractive term.

“It gives you an additional possibility of getting paid. But I’m not sure you’re going to need it. You’re probably going to be called before that,” he said.

Although a one-year call protection is pretty common with five-year autocalls, it was still a favorable feature.

“I like the no-call on the first year,” he said.

“You don’t want to be called three months down the road and have to redeploy your money because it costs you money to redeploy your money.

“It’s an intriguing little note.”

Raising the cap

Doucette’s real concern was the risk of underperforming a rising stock market.

“Over five years, I’m not too worried about the downside. But I’m not sure I would want to cap myself at 12% a year,” he said.

One possible change would be to reduce the size of the barrier in exchange for a higher call premium.

“When your upside is capped, you have to make sure it’s aligned with your market outlook.

“What if the market comes roaring back? Do I want to leave money on the table? You buy this note if you believe that the market is not going to be up more than 12.67% a year. We see how fast these things can come back. Just look at today,” he said.

A softer-than-expected inflation report triggered a strong rally on Thursday. The Russell 2000 index jumped more than 6% on the day. The Nasdaq climbed 7.35% and the S&P 500 index gained 5.5%.

Doucette said he would run scenarios decreasing the size of the barrier in small increments, going down from 25%, 20%, 15%, 10% and 0%.

“I would see how much coupon I can get for each protection level, and I’d decide if I’m willing to take the risk associated with it,” he said.

Likely call

Matt Medeiros, president and chief executive of the Institute for Wealth Management, whose view is less bullish, said the notes were “interesting.”

“I like the fact that it’s a long-term note. With that type of tenor, I’m comfortable with the 75% barrier,” he said.

The entry point added some level of safety.

“They’re pricing it at a time when the index is already down substantially, which is good,” he said.

When the notes priced last week, the Russell 2000 index closed at 1,800, or 21.3% off its Jan. 4 high.

“Given the initial strike, the likelihood of an autocall prior to maturity is very high,” he said.

Above average

Medeiros said his return expectations are moderate.

“I like the 12.64% rate. It’s above average. I think it’s very attractive,” he said.

This adviser does not expect a vigorous and durable market bounce back.

“I think you have to set your return expectations in the context of the current environment. And what do we have? We have a substantial rise in interest rates, an inflation that’s still high, potential supply chain disruptions, the possibility of a recession, geopolitical risks. ... there are a number of headwinds.

“If I look at the Russell, do I think it’s going to perform in the next 10 years as well as it did in the past 10? No, I don’t.

“Therefore, I’m perfectly happy with a 12.64% return especially since I believe the chances of getting it are quite high,” he said.

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

The guarantor is Goldman Sachs Group, Inc.

The notes settled on Wednesday.

The Cusip number is 36264U363.

The fee is 1%.

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