GS Finance’s $30.38 million autocalls index-linked notes on EAFE follow recent trend

By Emma Trincal

New York, Aug. 12 – GS Finance Corp.’s $30.38 million of 0% autocallable index-linked notes due Aug. 3, 2022 tied to the MSCI EAFE index come on the heels of similar products that have either priced or been announced recently. The structure combines over a short tenor one automatic call date after one year with leveraged participation at maturity.

The notes will be called at par plus a 10% annualized premium if the index closes at or above its initial level on Aug. 11, 2021, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes above its initial level, the payout at maturity will be par plus 4 times the return of the index, capped at par plus 46%.

Otherwise, investors will be exposed to any losses.

Sequence

“You really have to have a specific view of the market in order to maximize your profit,” a market participant said. “The index has to be below initial price a year from now. After that it has to rise about 11% in the last year. It’s not that much of a rise; it can be done, especially in one year. But all those things need to happen in that sequence.”

While the payout at maturity is appealing, investors have limited chances of holding the notes until the end of the term, let alone hitting the maximum return, he said.

“The structure is OK. It’s just probably a difficult sale because it’s very path dependent,” he added.

“Without being mathematical, there’s a 50% chance to get called and a 50% chance not to. If you’re in that 50% probability of holding it until maturity, you still need to make 11% in that last year to hit your cap.”

But perhaps a greater problem was the absence of any downside protection.

“You could try to recreate it shorting an at-the-money put. But it wouldn’t be comparable. From a risk-reward standpoint, there is nothing wrong with this structure. The pricing is right. It’s just not offering any protection, so you play at your own risk,” he said.

Similar deals

The structure mimics a couple of previous deals seen recently on the Securities and Exchange Commission website.

Last month, JPMorgan Chase Financial Co. LLC priced $1.8 million of 0% autocallable buffered return enhanced notes due Feb. 2, 2022 linked to the S&P 500 index. As with the GS Finance deal, the unique call date was timed one year after the trade date. But since the tenor is 18 months, the span between the call and maturity was six months shorter. This shorter “recovery” timeframe as it adds risk came with significant benefits not seen in the two-year Goldman deal, such as the elimination of the cap and a 10% buffer. The note, which was linked to the S&P 500 index. pays a call premium of 6% per annum.

JPMorgan is prepping another deal with the same terms to price in two weeks. The upcoming notes will be linked to the Nasdaq-100 index commending a 7% call premium.

“The Goldman product is more attractive in the sense that you have more time to recover,” the market participant said.

“On the other hand, they don’t give you any buffer and you’re capped.”

He conceded that the 46% cap was “fair.”

Both issuers have put together structures following a similar rationale, he said.

“The index has to be less than its initial level a year from today. Then you want it to rise x% to hit the cap.”

EAFE exposure

Aside from the unusual structure, the use of the EAFE index, which tracks the performance of developed countries ex-North America. was “an interesting story,” said a sellsider.

“International stocks in general tend to outperform in a weak dollar environment, and a lot of people are anticipating a prolonged weakening of the dollar,” he said.

“I see why people would want to invest in this index. That particular aspect of the trade looks good.”

Cut the leverage

The no-so-good aspect of the deal was the full exposure to market risk.

“I always prefer having some protection whether for income or for growth,” he said.

“I would be much more comfortable reallocating a portion of my equity portfolio in something that has a 10% buffer. That’s why people buy structured notes to begin with.

“I don’t need 4x leverage with a 46% cap. Just give me 2x with a 30% cap and a 10% buffer. That would look great.”

Short is new

The common trait between those deals is the short tenor, he said, adding that it was what made those products different and appealing.

“I’ve seen similar structures giving you an aggregated call premium at maturity plus participation. But a lot of them were five-year notes. To me, that’s silly. What makes this one compelling is the timeframe. A shorter term tells a more enticing story,” he said.

Hard pitch

Good products may not always be easy sales, this sellsider noted.

“The structure is innovative. The terms are good. Yet, it may be tough to show from a marketing standpoint.

“How do you pitch this note to a client? Is it a growth-oriented product? Is it income?

“It’s not as clear as describing an autocall or a leveraged product.”

But the concept warranted some attention from distributors.

“This type of hybrid structure caught my attention. It looks interesting.”

“It’s something new. It has compelling terms.

“A sales team should be marketing it,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on Monday.

The Cusip number is 40057CHP9.

The fee is 1.65%.

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