GS Finance’s autocallable index-linked notes on S&P 500 provide full protection, small premium

By Emma Trincal

New York, March 28 – GS Finance Corp.’s 0% autocallable index-linked notes due April 5, 2027 linked to the S&P 500 index give investors uncapped participation on the upside with full downside protection at the “risk” of a call after one year providing a limited gain.

The notes will be called at par plus 4% if the index closes at or above its initial level on the call observation date expected to be April 10, 2023, according to a 424B2 with the Securities and Exchange Commission.

If the final index level is positive, the payout at maturity will be par plus the index return. If the index level is zero or negative, the payout will be par.

New format

Issuers, including GS Finance, have often shown notes that provide uncapped participation at maturity with a unique autocall after one year, such as this one. But those usually are shorter-dated (two years on average) with a limited downside protection (barrier or buffer), a much higher call premium. In some cases, the issuer also provides leverage, according to data reviewed by Prospect News.

This version is entirely different with its extended maturity and modest call premium. But its uniqueness is the full principal protection, sources noted.

Principal protection

Carl Kunhardt, wealth adviser at Quest Capital Management, said the note has to be analyzed in two different sequences.

“You have to ask yourself two questions. First, is the S&P going to be down in five years, because that’s the main appeal of the note.... the full protection. And second, what happens in one year?” he said.

“To me this is not a five-year note. The note is going to get called at 4% in 2023. But let’s assume I’m wrong and that the S&P is negative a year from today. You keep on going. You’re long the S&P with a protection at the end.

“That’s hugely attractive if you are a defensive investor. I just don’t think it’s a good bet because the note is doing nothing for you. You’ll be long the index and your downside protection is not going to help you. You would be better off with the index fund.”

Beating the market, small

The call scenario was “more interesting” because it is more probable, he added.

“All of a sudden you get called. The principal protection now is irrelevant,” he said.

“What’s your view? Do you think the S&P will be up 4% or more in one year? If the answer is yes, you don’t need the note. Go long the index.

“If the answer is no, you have two options. If it’s down, good for you. The note pushes you four more years. You’re not taking a loss on a one-year product. If it’s up from 0% to 4%, you’ve outperformed.”

While positive, this last outcome was almost irrelevant, he noted.

“What are the odds, that you’ll be up less than 4% in one year?”

Making such a bet was unwise as the “odds are too small,” he said. And even if the bet won, the note would not bring much value due to the outperformance limited to 4%, he added.

“All the note is really doing is putting me in an S&P fund with full principal protection.”

The investment was not even exactly the equivalent of an ETF given the five-year holding period and the non-payment of dividends.

“For the skittish investor with zero risk tolerance, I would do it. Otherwise, I wouldn’t,” he said.

Low risk

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said the investment would be appropriate for some of his clients.

“For a retiree, someone who is really risk-averse, this may work,” he said.

“Some investors just don’t want to even take a chance to lose money and they’re OK not making a lot.”

In that case, the call with 4% after one year would be a positive scenario, he said. Even holding the notes for five years with the guarantee of not losing any money would also be acceptable.

Uncertainty ahead

“There is a tradeoff in this note. You accept a very small call premium to get the principal protection in five years.

“Depending on how bad things can get, I think it’s fair.

“I have no idea what the market will be like in five years. But a lot of our growth since 2008 has come from the Fed cutting rates and supporting the market.

“What’s going to happen when they stop doing that?” he said.

Pool said he is considering using the notes.

“If the notes get called in one year, I will put the proceeds in the appropriate allocation. I don’t know at this time if it will be a cash allocation of not. It depends on a number of things. How much will the Fed raise rates within one year? 1%? 1.25%? 1.5%? And where will the war in Europe be at that point?”

Pool said he may use the notes for some of his most conservative investors.

“I would get an allocation for a risk-averse client. I wouldn’t give this for someone who is 25 years old. “But for an older client with excess cash who wants to be in the market with the full protection, this looks like a good fit,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes are expected to price on March 31 and to settle on April 5.

The Cusip number is 40057LL66.

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