GS Finance’s notes on Euro Stoxx 50 index, Stoxx Europe 600 index offer high leverage, no cap

By Emma Trincal

New York, Aug. 23 – GS Finance Corp.’s 0% index-linked notes due Aug. 31, 2026 linked to the lesser performing of the Euro Stoxx 50 index and the Stoxx Europe 600 index provide a high leverage multiple and no cap, two features that should benefit investors seeking exposure to European stocks, an asset class known for lagging the domestic market, financial advisers said. The only limitation is the five-year holding period, making the investment only suitable for long-term investors.

If each index finishes at or above its initial level, the payout at maturity will be par plus 2.5165 times the return of the worst performer, according to a 424B2 filing with the Securities and Exchange Commission.

If any index finishes below its initial level, but none decline by more than 30%, the payout at maturity will be par. Otherwise, investors will be exposed the decline of the worst performer from its initial level.

Overlap

Jeff Pietsch, founder of Eastsound Capital Advisors, said the structure gave investors a chance to generate high returns or outperform if the underlying index is up.

“I kind of like this as a strategic holding,” he said.

“It’s a good match for a sophisticated investor seeking European exposure.

“And I’m not too concerned about the worst-of given that these are two European benchmarks.”

The Stoxx Europe 600 index is a large capitalization index representing 17 European countries, including members and non-members of the euro zone.

The Euro Stoxx 50 index tracks 50 European blue-chip stocks of 11 euro zone countries. Each one of those countries are already represented in the Stoxx Europe 600 index, inducing a high correlation between the two underlying.

“European stocks have underperformed the U.S. for so long, some analysts have low expectations for future returns in Europe,” Pietsch said.

The Euro Stoxx 50 index has returned 35.7% over the past five years and the Stoxx Europe 600 index, 37.6%.

During the same time, the S&P 500 index has gained 105%.

Win-win

Pietsch reviewed the two possible upside scenarios.

“You could get a low return scenario for the next five years in alignment with the analysts’ expectations. If that happens, the leverage would be a way to significantly enhance those returns.

“On the other hand, if they do mean revert to catch up to the U.S., we have the possibility of a huge win.

“Having no cap makes either of these scenarios very attractive.”

Pietsch was also comfortable with the downside protection.

“This level of barrier is sufficient to cover a bear market because over five years, we will have some gains along the way. There is ample time to make this barrier sufficient,” he said.

Dividends

As with any other note, investors are not entitled to receive dividend payments.

The dividend yields on the Stoxx Europe 600 index and the Euro Stoxx 50 index are 1.85% and 2.1%, respectively.

“There’s a significant dividend give-up over five years, but the leverage more than compensates for that,” he said.

“I like it for a long-term position.”

Correlation

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, said he liked the structure overall but not the long holding period.

“It’s an interesting note. We have no problem with Goldman Sachs as an issuer, but we don’t love five-year notes,” he said.

He also stressed the benefit of having two large-cap indexes in the same geographic region.

“It’s a worst-of but one that’s based on two European stock indexes with a very high correlation, so it’s not so bad,” he said.

“It’s a little bit like having the Dow and the S&P. They’re reasonably close.”

Foldes said that having exposure to European stocks was a good idea because they offer a better value than U.S. equities.

“Europe is part of any globally diversified portfolio. In addition, European markets have underperformed domestic markets so it’s a good place to be in terms of returns,” he said.

Barrier to better terms

The upside payout was the best part of the deal. Foldes criticized the barrier.

“I like the 2.52 times very much. Obviously, having an uncapped levered note is a real plus,” he said.

“But my bias is on the downside. I don’t believe a 30% barrier is necessary. In fact, on a four- or five-year note, I wouldn’t want any barrier.”

With a broadly diversified index, the odds of finishing negative over four or five years were very limited, he said.

“I don’t have the numbers for the rolling periods. But the probabilities of a negative return may possibly be less than 10% on a historical basis,” he said.

“Instead of a barrier, I would pile into more leverage.”

However, a shorter duration would be even better.

“Having a shorter term would be my first choice. The greater leverage, my second,” he said.

Leverage, tenor

The leverage was not just needed to enhance performance. It also allowed investors to make up for some opportunity costs.

“You’re giving up about 10% in dividend payments, or slightly more if compounded, which is why it’s so important to have the leverage. You have the fee in addition to that,” he said.

The fee, which is built into the structure, is 2.15%, according to the prospectus.

“That’s why I’m looking at higher leverage rates because Goldman as well as other banks is expensive,” he noted.

“Overall, having uncapped leveraged exposure to this area is terrific.

“But I’d like to see a shorter duration.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes will price on Aug. 30 and settle on Sept. 2.

The Cusip number is 40057JBX3.

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