GS Finance’s $13.92 million trigger jump notes tied to Euro Stoxx offer bullish, long-term bet

By Emma Trincal

New York, Dec. 2 – GS Finance Corp.’s $13.92 million of 0% trigger jump securities due Nov. 18, 2025 linked to the Euro Stoxx 50 index offer upside enhancement and uncapped exposure on the upside with a deep barrier against losses.

For investors seeking European equity exposure, the benefits outweighed the long tenor and non-payment of a rich dividend yield, advisers said.

If the index finishes at or above its initial level, the payout at maturity will equal par of $10 plus the greater of the index return and the 75.8% fixed payment percentage, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 40%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline from the initial level.

“You have to want the exposure to Europe, specifically to the euro zone,” said Jerrod Dawson, director of investment research at Quest Capital Management.

Too French

Dawson is not very bullish on this part of the world.

“The euro zone has a number of issues starting with Brexit. Even if the U.K. is not in the index, a Brexit would have a negative impact on Europe,” he added.

“Unless you have strong feelings about France, I’d rather invest in a more diversified benchmark.”

France is the top allocation in the SPDR Euro Stoxx 50 exchange-traded fund. The ETF tracks the underlying index under the NYSE Arca ticker “FEZ.” The country weighting for France is 38.83%, followed by Germany with 28.80%.

“It’s a bit weird that they would allocate more to France since Germany’s economy is the biggest in Europe,” he said.

“In any event, I would want a broader index if my goal was to get exposure to Europe.”

He mentioned as an example the more diversified Stoxx Europe 600 index.

Jump versus dividends

However, Dawson said the structure of the notes offered a number of attractive features.

“I like the 75.8% kicker. Even if this index does nothing, as long as it’s not down, you get at least 75.8% at the end,” he said.

“I also like the barrier. Forty percent is a healthy protection, especially on a longer timeframe. It gives you enough time to recover if we have a pullback. The long maturity here works to your advantage.”

The least attractive aspect of the deal was the high amount of dividends investors would have to give up when purchasing the notes. The Euro Stoxx 50 index yields about 3.5%.

“Over six years, you’re giving up more than 20%, and that’s a lot. But the guaranteed jump return on the upside combined with this very defensive barrier mostly offsets my concerns over the dividends.”

Credit, fee

For Michael Kalscheur, financial adviser at Castle Wealth Advisors, the six-year tenor was not a drawback.

“We like those longer notes,” he said.

The terms of the notes in general, more than the choice of the underlying index, fit the requirements he needs for his portfolio.

“It’s a very nice offering. The terms of this deal are extremely good.”

He first analyzed the credit risk, cost and underlying exposure.

“Goldman Sachs has wider spreads relative to other U.S. banks. But all spreads have come in a lot, so it’s not really meaningful,” he said.

He added that he looks at Goldman’s offerings on a regular basis and has “no issue” with this issuer’s credit.

The 3.875% fee, as disclosed in the prospectus, was “a little bit high” but “still competitive” on an annualized basis at about 64 basis points.

Underweight tech

The Euro Stoxx 50 index, on the other hand, would not be his first choice. With only 50 constituents, the benchmark was too concentrated, he said, compared with the S&P 500 index.

“I guess the Dow only has 30 constituents. But there are other issues with the Euro Stoxx that I’m not crazy about,” he said.

“For instance, it is underweight tech. You don’t find the Amazon, Apple, Facebook and Google in the Euro Stoxx. Besides SAP, I can’t think of any big tech name in there.”

SAP SE is a German software corporation. Its stock is the top holding in the index but with a 5% weight only.

Solid barrier

The information technology sector makes for less than 11% of the index fund. The sector’s weighting is 23% in the S&P 500 index and more than 20% in the Dow Jones industrial average.

“Now for someone who wants exposure to Europe, the terms of this deal are excellent,” he said.

Kalscheur assessed the value of the 40% contingent downside protection looking at back-testing data on the SPDR Euro Stoxx 50 ETF.

“Using six-year rolling periods, we found that this FEZ fund has never been down 40% or more since 2002, not even once,” he said.

“We did some extrapolations and ran the same analysis on the S&P 500 index and the Dow over the past 50 years. Neither one of them had a 40% decline over the course of a six-year period.

“I feel very confident that the chances of breaching that barrier are close to zero.”

Fair trade-off

Kalscheur said that there is a reason why investors should get an attractive payout.

“You’d better have good terms if you’re giving up a 20% rate of return just in the income during that six-year period,” he said.

“But it’s worth it. If all I have to do to get 75.8% in six years is to be at or above the initial price of the index, you don’t have to do a lot to convince me that my chances of success are pretty high.

“Worst-case scenario, it’s down 1% at the end and you have to explain to your client that he’s not going to get the 20% dividends. It’s a hard pill to swallow, but it’s not like you’ve lost money.

“In fact, it’s very unlikely that you’re going to lose money after six years.”

Going back to the upside payout, he said that “the icing on the cake is the booster,” which represents about 10% a year on a compounded basis.

Having no cap above the 75.8% “booster” was another positive feature.

“If the market is up 100%, I’m up 100%. If the market is up 50%, I’m up 75%. If it’s up 1%, I’m up 75%,” he said.

“I’m not surprised they priced $14 million of it. It’s something we definitely would have been interested in.

“They had a lot of yield to work with, but they did a pretty good offering with it.

“My only concern is the international exposure. It’s a bit too euro-centric to me.

“I can see myself using it not as a core but as a complement to an international equity exposure.”

The notes are guaranteed by Goldman Sachs Group, Inc.

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

The notes settled on Nov. 18.

The Cusip is 36258L833.

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