GS Finance’s $1.03 million notes on indexes show one-time call, enhanced return, no cap

By Emma Trincal

New York, July 21 – GS Finance Corp.’s 0% autocallable index-linked notes due July 23, 2026 tied to the least performing of the Nasdaq-100 index and the S&P 500 index present a hybrid structure with one opportunity to earn a call premium upon the early redemption and at maturity, an enhanced return with unlimited upside.

The notes will be automatically called at par plus 24.12% if each index closes at or above 110% of its initial level on Jan 16, 2024, 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 double the return of the least performing index.

The structure also provides for contingent downside protection.

If the worst performing index finishes negative but at or above its 70% downside threshold level, the payout will be par. If it finishes below its downside threshold level, investors will be fully exposed to the decline of that index from its initial level.

One call observation

“We’re seeing more of those types of structures,” a distributor said.

“Only one call in two-and-a-half years, half-way through the term, and if it’s not called, you get two-times the upside and no cap.

“This one is a little bit different. It has a longer maturity and a 110% trigger for the call instead of par.”

Other issuers, including JPMorgan Chase Financial Co. LLC and Citigroup Global Markets Holdings Inc. have offered similar products with one automatic call and uncapped participation at maturity if the notes are not called, with or without leverage. But most of those products have tenors of two to three years, according to data compiled by Prospect News.

On a shorter tenor, the unique call observation leaves less time for the underlying to rebound from the call date to the end of the term, he noted.

Step up

“It’s a good timeframe,” he added.

“The 24% premium after two-and-a-half years is reasonable. At least you get roughly 9% a year, which is not bad.”

Perhaps the best outcome for investors is to see the notes called on January 2024, he said.

“It eliminates the end-point risk. I’m called, I’m done.”

The 110% step up is another particularity of this structure as nearly all automatic calls strike at initial price.

“You would get less of a premium without the step up,” he said.

Since investors only get called if the underlying is up at least 10% after two-and-a-half years, they may not outperform the underlying worst-of.

“But at least the payment is twice the step up. It’s a guaranteed 14% above the step up with no risk,” he said.

Five-year term

A market participant said these “one-observation” calls can help issuers with pricing.

“The longer maturity is good. If the index is down after two-and-a-half years, it can bounce back. You still have time,” he said.

“It allows issuers to give you a higher participation. It makes the cost of the structure cheaper.”

Not all similar structures come with a barrier. But this one offers a 70% contingent protection, he noted.

This market participant tends to offer shorter-dated structured notes but admitted that longer terms can benefit investors.

Bond substitute

“The longer, the higher the coupon. The call premium you get here is good,” he said.

Investors may use the notes as fixed-income replacement.

“What kind of bond can pay 25% after two-and-a-half years? It’s riskier than a bond of course, but it’s a good risk-reward. You still have a 70% barrier and a decent chance of getting called.

“It’s not a bad structure.”

The notes settled on Wednesday.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The Cusip number is 40057HV80.

The fee is 0.5%.

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