GS Finance’s buffered PLUS linked to Euro Stoxx 50 index could be used as recovery strategy

By Emma Trincal

New York, Feb. 17 – The leverage and cap level of GS Finance Corp.’s 0% buffered Performance Leveraged Upside Securities due March 5, 2019 linked to the Euro Stoxx 50 index may help investors who have lost money or earned less than anticipated in their European equity portfolios to recover some of their losses or hedge their existing positions, a market participant said.

If the final index level is greater than the initial index level, the payout at maturity will be par of $10 plus 200% of the index return, subject to a maximum return of 41%, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 10% or less and will lose 1% for every 1% that the index declines beyond 10%.

Recovery strategy

“It’s a good idea. If you get 41% at the end of three years, everybody will be happy,” the market participant said.

The index only has to rise by about 6.5% a year to enable investors to receive the annualized cap of 12.15% on a compounded basis.

“You cap your return for a faster track. That may make sense, especially if you use this as a way to recover some of your losses,” he said.

The Euro Stoxx 50 index carries a 3.25% yield, which investors will not receive as noteholders, according to the prospectus. The non-payment of dividends is common with structured notes.

Investors do not get the dividends, “but what you’re actually giving up is less” since “you pay ordinary income taxes on your distribution.”

Value or laggard

Part of the appeal of the Euro Stoxx 50 is its lower valuation when compared to the U.S. large-cap benchmark, he noted.

The Euro Stoxx 50 index, which tracks the euro zone equity markets, continues to lag the S&P 500 index.

For instance, it has lost 8.35% this year versus a 5.75% decline in the S&P 500.

Over the past year, the European benchmark fell 18%, underperforming the S&P 500 by 10 percentage points.

“The Euro Stoxx appeared to have value. That’s what we thought before. We were wrong. Whether it becomes a good idea to be bullish on the Euro Stoxx depends on a number of things,” he added.

“Mostly, it will depend on the central banks’ stimulus programs. Right now Europe and the U.S. are not in the same business cycle. The Fed’s hikes are not off the table. People don’t talk about it now, but they will at some point.

“The U.S. is already in full employment mode and close to the inflation target. In Europe, there’s a 10.5% unemployment rate. It’s a deflationary environment.

“If the Euro Stoxx moves up even moderately, this note can help investors to outperform the benchmark.”

Asymetrical leverage

Clemens Kownatzki, an independent currency and options trader, said that the terms are attractive.

“I can’t find much that’s wrong with this note except the fact that you might have to give up some upside at the end of the three-year period if we see a massive increase in the Euro Stoxx,” Kownatzki said.

“I like the idea of a 10% buffer and the fact that it’s one-to-one only after 10%.

“The two times leverage with a 41% cap is attractive. The three-year timeframe is OK too.”

He saw the use of a high-yielding index with no rights to receive dividend distribution as a mere trade-off.

“You don’t get the 3% a year, but you have two time leverage on the upside and no leverage on the downside. If you had to replicate the leverage with the index fund, you could but it would probably cost you as much as the dividend you are foregoing.

“Overall, I think it’s a decent product.”

Goldman Sachs & Co. is the agent. Morgan Stanley Wealth Management is acting as dealer.

The notes will be guaranteed by Goldman Sachs Group, Inc.

The trade date is Feb. 29.

The Cusip number is 36250E407.

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