GS Finance’s $1.64 million autocalls on Russell Value, S&P offer premium and participation

By Emma Trincal

New York, March 2 – GS Finance Corp.’s $1.64 million of 0% autocallable index-linked notes due March 3, 2025 tied to the S&P 500 index and the Russell 2000 Value index provide investors with a single call observation, paying a double-digit premium and possibly enhanced return at maturity in the absence of a call.

But advisers need to analyze the consequences of reducing the number of calls to one, said a market participant.

If each index closes at or above its initial level on Feb. 23, 2023, the notes will be called at par plus a 10.5% call premium, 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 will be par plus 150% of the laggard index’s return.

If the worst performer declines but finishes at or above 70% of its initial level, the payout will be par.

If any index falls by more than 30%, investors will lose 1% for every 1% decline of the worst performer from its initial level.

Wrong assumptions

“It’s not a bad deal. But sometimes people buy something for the wrong reason, “the market participant said.

“If you don’t get called, you’re negative. You then have two years to go from negative to positive.”

This type of structure has gained popularity among investors because it offers a hybrid payout. Gains can be made from the one-time autocall or at maturity through uncapped participation.

“I’ve seen this structure before and I’ve noticed that advisers buy it hoping they can get the leverage with no cap in a short amount of time, three years here,” he said.

“And the reasoning goes: I’m not taking on much risk. The market is down now. But in two years, it will be over. There’s enough time for a rebound.

“It shows how little advisers know about derivatives.

“The idea that more time gives you more chances to win is silly.

“How about you have more risk?”

Only one call

The structure differs from most autocalls in that it offers only one observation. The appeal is the enhanced participation at maturity.

“Let’s take a look at the rationale behind having only one call instead of several,” he said.

“A typical three-year autocall with quarterly observations will give you 11 calls if you exclude the maturity.

“That’s 11 lifeboats.

“When you get called, you get paid. No more risk. End of problem.

“So, reducing the number of calls from 11 to one is obviously going to give you attractive features in exchange. One of them, in my view when I look at this deal, is the 70% barrier.”

The 10.5% call premium at the end of the first year was also an attractive feature. For investors, it may also be the most desirable outcome, he added.

Don’t miss that call

The structure could be compared to a regular reverse convertible in which investors are long 1.5 calls and short a put over two years.

“If you don’t get called on the first year, that’s because the market is down. If the market is down, the put you sell has more value than the call.

The longer the period between the end of the first year and maturity, the greater the risk, he said.

“Advisers can’t help thinking they’re taking less risk when there is more time. Time will bring the market back up. Well, the market doesn’t always go back. It’s a 50/50 chance. The market can also fall even more,” he said.

“Unfortunately, that’s how advisers are looking at deals and that’s how salespeople sell those deals.

“Overall, however, there was nothing wrong with the structure itself.

“I don’t believe in bad deals. Everything is about pricing. But too often, advisers make the wrong decision based on the wrong assumption.”

Income preferred

A structured notes distributor said he prefers to stick to pure income plays via traditional autocalls.

“We do things like snowballs. This is different. But I can see why people would do something like that,” he said.

“I’m not sure I like the Russell 2000 Value index though. We shy away from these made-up indices. It’s too esoteric for our clients.”

If investors miss the first-year call, the notes carry more risk, he said.

“Two years is a long time. It could be a crapshoot. If you’re lucky on your timing, you get a good return.”

But this distributor’s main objection to the structure was the level at which indices need to be in order for investors to pocket gains either via the call premium or the enhanced return at maturity.

“In each case you need to be above initial price,” he said.

“I prefer autocalls that pay you interest at a lower barrier level. It’s easier to get paid that way and you can collect several coupon payments.”

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 40057KZA4.

The fee is 3.5%.

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