GS Finance’s $50 million notes on next gen, tech, growth indexes offer bull play on innovation

By Emma Trincal

New York, May 19 – GS Finance Corp.’s $50 million of 0% autocallable index-linked notes due May 16, 2024 tied to the Nasdaq Next Generation 100 index, Nasdaq-100 Technology Sector index and Russell 1000 Growth index was one of the landmark deals to price last week for its size, underlying mix geared toward growth and structure type combining an automatic call and leveraged participation at maturity.

The notes will be called at par plus a 13% premium if each index closes at or above its initial level on May 19, 2022, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and each index finishes at or above its initial level, the payout at maturity will be par plus 1.51 times the return of the least performing index. Otherwise, investors will be fully exposed to the decline of the least performing index.

High performance

Matt Rosenberg, director at Halo Investing, said the combination of a call premium and aggressive-growth underlying indexes gave investors a bullish way to play the sector.

“People are liking the call premium products. This one at 13% is very aggressive,” he said.

“These indices have the ability to pop. If it doesn’t call, the 1.5x leverage could be beneficial and make up for the lack of achieving that call premium.”

Time to rebound

Some similar structures have a shorter window of time between the call date and the maturity date. Ranges between six months and a year have been seen before on those types of products.

Rosenberg said that having two years was an advantage.

“If you only had one year between the call and maturity, it would be high risk,” he said.

“Your risk on the upside is having indices that lack the potential for growth and also not having enough recovery time if you don’t get called.”

The note addressed both risks.

“Two years is a decent window of time to compound solid returns, and the indices have high growth potential.”

Downside risk

One caveat: the lack of downside protection.

“It’s not for everyone,” he said.

“The main benefit of structured products has always been and still is that level of downside protection to it.

“We’re in a frothy market for tech. We’ve seen ARKK for instance surging, but it’s now incurring a lot of short-term pain. So having nothing on the downside is problematic. Any of those indices could be down 30% or even more.”

He was referring to the Ark Innovation ETF, consisting of stocks of companies generating “disruptive” innovation. The fund last year jumped 147% but has dropped more than 35% this year since its February 52-week high.

Theme-oriented

A market participant said one striking aspect of the deal was the exposure to indexes of innovative companies with high-growth potential.

“It looks like a growth theme. The Next Generation one is probably a little bit like ARKK,” he said.

“I like the theme. These indices are innovative although I’m not sure there is a lot of correlation between them.”

Low correlations between underliers in worst-of structures add risk and therefore, more premium.

Call and leverage

The structure is hybrid with its unique call after one year and leveraged participation at maturity.

“I’ve seen those kinds of deals here and there before. It’s not the most common structure, but it’s been done,” he said.

The call helps from a pricing perspective, he added.

“If the underlying is up a lot, the issuer is able to call at 13%, and may not have to pay something significantly higher,” he said.

Biggie

The size of the deal was also notable.

“$50 million is very impressive,” he said.

“I wonder if it was some kind of custom deal. It’s hard to tell who bought it because there are contradictory signals. For instance, it’s strange to get a round number for retail distribution. On the other hand, there’s a 3.625% commission. If it were for a [registered investment adviser], I’m not sure there would be an underwriting discount.”

For bulls only

The weak spot in the structure was on the downside.

“The only thing I find strange is that they didn’t build any downside protection in it. I’m not sure it would have been all that expensive,” he said.

“Maybe they wanted to make it simpler and create a substitute for a direct holding.

“If you believe in growth stocks, you’re going to get some nice participation. 1.51% in leverage is very nice. If you believe in this theme, you play the bullish side.”

Issuers often give up adding protection to a structure due to the cost.

“As soon as you include a barrier or a buffer, it distracts you from either the call premium or the leverage. They may have calculated that for investors willing to play a bullish, aggressive growth theme with conviction this was the way to maximize the upside.”

In conclusion, the downside exposure did not matter all that much to investors given the size of the trade, he said.

“You can’t argue with success. Obviously, investors liked the note and purchased it as it fit their market outlook.

“It was an effective structure that had good appeal.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes priced on May 12 and settled on Monday.

The Cusip number is 40057HBR0.

© 2015 Prospect News.
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