GS Finance’s $9.71 million trigger PLUS on Stoxx, S&P basket to fit into long-term portfolios

By Emma Trincal

New York, June 22 – In the current market environment issuers trying to price uncapped leveraged notes have limited options. Extending maturities and/or using worst-of payouts are among the most common practices.

A recent deal does away with the worst-of but showed a six-year tenor, which allows for the no-cap but is only suitable for certain types of investors, advisers said.

GS Finance Corp. priced $9.71 million of 0% trigger Performance Leveraged Upside Securities due July 6, 2027 linked to an equally weighted basket of the S&P 500 index and the Euro Stoxx 50 index, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is greater than or equal to the initial level, the payout at maturity will be par of $10 plus 148% of the basket return. If the basket declines by 25% or less, the payout will be par. If the basket declines by more than 25%, investors will lose 1% for every 1% that the basket declines from its initial level.

Longer tenor

Jonathan Tiemann, president of Tiemann Investment Advisors, said that the six-year maturity was not necessarily a disadvantage as long as it fit the investor’s profile.

“The six-year is not a bad thing if you are willing to have a long-term exposure,” he said.

“The odds are good that if we have a crash, you will get enough time for a recovery.

“Overall, the terms of the notes compensate you for having your money tied up for a long period of time.”

Dividend loss break-even

The uncapped and leveraged upside made the structure valuable despite the non-payment of dividends.

“They don’t pay you the dividends. But the leverage can easily offset such opportunity cost,” he said.

The dividend yield of the Euro Stoxx 50 index and the S&P 500 index is 2.2% and 1.4%, respectively.

“If the basket is up 22% to 23% at the end of the six years, you break even. Any increase above that level, you come out ahead with the notes even without collecting the dividends,” he said.

“A 23% break-even point over six years, it’s not that high a threshold.”

For investors who don’t mind holding the notes for six years, the deal “is not bad,” he said.

Tiemann added that he “doesn’t worry about the exposure to Goldman Sachs’ credit.

“You’re being compensated for this. I assume it’s part of what you’re being paid for,” he said.

Downside advantage

The risk on the downside was less than having a long position in the basket.

“If the basket is down 25% you get all your money back. You’re doing pretty well.

If it’s down more than 25%, you are in the same position as someone holding the underlying although it’s without the dividends,” he said.

Long-term style

With this long tenor, the notes could be a good fit in a buy-and-hold portfolio already including the two index components of the basket, he said.

“It could be used as a complement. Again, you have to be willing to hold the notes over the long haul. But if you do, it’s an OK strategy.

“It’s not hugely better than owning the underlying. But it’s a good alternative,” he said.

Thin barrier

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said he was not impressed with the barrier size.

“You basically have a 25% downside barrier and 50/50 S&P and Euro Stoxx and then 1.5x leverage and no cap. At first, it seems reasonable,” he said.

“But frankly six years is a long time. I’m not sure I’d be comfortable with a 25% barrier for six years.

“If you look at the institutional research, analysts are pointing to a 40% to 60% drawdown in the next few years. If that’s the case, the barrier is not going to give you enough protection.”

Good for bulls

The notes however may fit investors with a more upbeat outlook, he said.

“As long as we don’t have that kind of drawdown, it’s fine.

“Europe is coming out of a stagnation crisis and the U.S. equity markets are overpriced.

“But the Fed money is coming in the market, so it’s supporting stock prices.

“As long as the market remains buoyant, the note is OK. But it doesn’t do much in terms of risk management,” he said.

And risk mitigation was his main concern.

Post-crash timing

Chisholm refuted the notion that a six-year tenor is relatively safe because it provides enough time for a recovery after a bear market, bear markets being short-lived.

“I think it’s not a sound assumption. It will depend on when the market will come back. You can’t expect a rebound like last year. It was a very unique, unusual situation.

“The Fed once again helped a lot. But what if we become like Japan and the market doesn’t go back up quickly?

“You’re stuck holding this thing and you could be down a lot without being able to do much.

“A better alternative would be to do something more liquid. At least you could protect your principal against a sell-off,” he said.

Euro Stoxx

Another financial adviser had concerns about one of the two basket components and therefore would not consider buying the notes. This adviser wants to be able to easily put back a note to the issuer.

“I lost hope with the Euro Stoxx. It’s harder to track, harder to get pricing on,” he said.

“If you want to get out it takes two days, supposedly because of the different time zone. It’s a mess. I’m staying away from it.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter. Morgan Stanley Wealth Management is a dealer.

The notes settled on June 16.

The Cusip number is 36260Y245.

The fee is 3.5%.

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