GS Finance’s $9.1 million autocall on S&P introduce income element on ‘catapult’ structure

By Emma Trincal

New York, Oct. 17 – GS Finance Corp.’s $9.1 million of autocallable variable coupon index-linked notes due Oct. 9, 2025 linked to the S&P 500 index add a novel feature to a commonly used structure, coined “catapult.”

The generic structure combines an autocall after one year, and in the absence of a call, leveraged uncapped participation at maturity. In this novel version, GS Finance adds a guaranteed coupon if the call fails to occur, which sources saw as a compensation for the loss of dividends.

The notes will pay a one-time coupon on Oct. 7, 2024 at a rate of 9% if the index closes above its initial level. Otherwise, the coupon will be paid at a rate of 4%, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus the coupon if the index closes at or above its initial level on Oct. 7, 2024.

The payout at maturity will be par plus two times any index gain. If the index falls by up to 10%, the payout will be par. Investors will be exposed to losses beyond 10%.

Missing the recovery

“I like the fee. It’s reasonable. The two-year term is also a good thing. We like short-term notes. I also like the credit of the issuer. No problem with that. Having said that, I don’t like the notes,” said Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management.

The fee amount is 0.25%, according to the prospectus.

For this adviser, the note was likely to underperform a year from now.

He pointed to the current level of the S&P 500 index, which is 9% off its high of January 2022.

“History shows that over the past 100 years, the S&P has always recovered to a higher high than the previous high. I would not want to cap my upside on an asset class that is going to recover from its decline,” he said.

Foldes sees the S&P 500 index bouncing back over the next 12 months, which would cause the notes to get called at the 9% premium, a level he expects to be below market level.

“We’re closer to the end of the Fed’s rate hiking cycle. The market will be able to breathe again with the Fed not raising rates. It will give the S&P an opportunity to rebound. It’s a non-starter for us to limit our upside to a 9% coupon in this context,” he said.

As an alternative, Foldes said he would rather give up the buffer at maturity in order to eliminate the call option, transforming the security into a bullet while maintaining the upside payout – 2x leveraged exposure with no cap.

Bearish bias

The note appeared to be slightly bearish to Foldes.

“This was probably designed for people looking for income, happy to get a guaranteed 4% for the two-year. If the market is down, at least you get some income and some protection.

“I imagine it was a customized offering created for an adviser quite bearish,” he said.

Since he expects the index to be higher in one year, Foldes sees the 9% call premium as nearly unavoidable.

“If you don’t expect more than that, if you’re somehow pessimistic about the market, it’s fine.

“But to us, being locked in at 9% is a significant opportunity cost,” he said.

Likely call

Another adviser examined the value of the 9% call premium based on various probabilities of outcomes.

His first impression was that any equity return that is less than 10% a year is “inadequate” in relation to the risk taken.

“At the same time, 9% is not a deal-breaker. But you have to see what it means in terms of probabilities,” he said.

This adviser analyzed back-testing performance data on the S&P 500 index since 1950 looking at 12-month rolling periods.

He found that the chances of being called (index flat or positive on the call date) were 73.6%.

“Almost three-quarters of the time, you’ll be called at the end of the first year with the 9% return,” he said.

He broke down this probability into two separate buckets.

The first one was the outperformance bucket, which was when the index rises by less than 9%. This scenario happened 20.6% of the time.

The second bucket was associated to an underperforming note. It corresponded to the index finishing above 9% on the call date. Such scenario happened 53% of the time.

“More than half of the time, you’ll underperform the index when you get called,” he said.

“The odds are not great.”

However, investors are probably hoping to see the S&P fall into a scenario in which they can hold the notes to maturity, he said.

“That’s when the index is negative after one year. You have one out of four chances to see this happening,” he said.

The probability is 26.4%.

Hoping to hold it

“I think people do this note for the amazing terms at maturity. If you can avoid being called, you get everything at the end of the two years: the 2x leverage, the no-cap, the buffer. And since you have the 4% coupon, which more than covers the dividends, there’s zero chance of underperforming the index,” he said.

The S&P 500 index has a dividend yield of 1.62%.

“People are betting on that second bite of the apple.

“I can see why people would want to roll the dice knowing that they have one out of four chances to outperform the index.

“It is a bet, but not necessarily a bad one as long as you only put a little bit of money on it,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes settled on Oct. 11.

The Cusip number is 40057WG76.

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