Goldman Sachs $175.56 million autocallable notes tied to three indexes a popular structure

By Emma Trincal

New York, Nov. 24 - In the repeat of the most popular structured product offering of the month, Goldman Sachs Group Inc. priced $175.56 million of autocallable notes on Thursday, following one $346.80 million sale done just a few days before.

The success of those similar transactions is probably due to a very attractive structure and a renewed market interest for autocallables, sources said.

"It sounds quite good," said structured products analyst Suzi Hampson with Future Value Consultants. "With $350 million in sales, it must sound attractive to some people."

Goldman Sachs Group sold 0% autocallable underlier-linked notes due Aug. 27, 2010 linked to a basket of indexes, according to a 424B2 filing with the Securities and Exchange Commission.

The basket included the Dow Jones Euro Stoxx 50 index with a 49% weight, the Topix index with a 28% weight and the FTSE 100 index with a 23% weight.

If the basket closes at or above 107% of its initial level on any call observation date, the notes will be automatically called at par plus 7%. The observation dates will be Tuesday of each week and will include the final valuation date.

If the notes are not called and the basket closes below 84.5% of its initial level on any day during the life of the notes, the payout at maturity will be par plus the basket return. Otherwise, the payout will be par plus the greater of 2% and the basket return.

"You can get quite a good return in less than nine months if it gets called," said Hampson. "And that's what investors are hoping to get."

She added that in order to get the call, investors "do not need that much growth" in the underlying basket. "One hundred and seven percent is not too much asking."

A remake version

Both the $175.56 million sale on Thursday and the prior deal, which saw the sale of $346.80 million about a week before, are almost identical and have a few things in common, sources said. They brought large sales proceeds, have a short-term maturity and offer potentially high returns. As long as the 15% barrier - similar in both deals - is not breached, investors may earn between the 2% minimum and a 7% capped return. Both quasi-identical structures were sold by JPMorgan acting as the co-agent on both deals.

The main structural difference between the two deals is the underlying. The first deal was linked to the S&P 500 and second one referenced a basket of foreign equity indices.

Popular call

Many agreed that the call feature with a potential high coupon was the most attractive aspect of the transaction.

"The upside is your 7% return, which you can reach potentially quickly," said Kirk Chisholm, wealth manager and principal with NUA Advisor. "If you're looking to take on some market risk, it would work for the right person."

Chisholm said that the 7% cap "does not give investors as much upside as what we've had," but that no one knows whether the market will continue to rise at this pace looking forward. "If things remain flat or even up a bit, it makes sense," he said, adding that "the call makes it very interesting."

Hampson noted another enticing factor with the call was the weekly review date. "It gives investors a high probability of a kick-out before the end. Obviously you want this to happen," she said.

That is not to say that the deal is risk-free for investors, she added. "The risk is reduced because you have a barrier. However, the 15% barrier is not huge," she said.

Simple is better

Another benefit of the structure is its simplicity. "It's an easy to understand structure, and that too is very attractive," said Hampson. She added that simplicity along with the call features is what makes auttocallable notes very attractive to investors.

"Fixed return is attractive to people," she said. "People know the minimum coupon they'll get if the barrier is not breached. They know the cap. They buy these notes expecting that they will get called before end."

Institutional investors

Given the size of the deals and the relatively small underwriting fee of 80 basis points, some said that the deal was probably not subscribed by retail investors but rather by one or several institutional investors.

"When you see a deal of that size it's usually an institutional buyer," said a sellsider. "I've been watching this trade and trying to see if it would be available for retail. But once you put the fees in there, it just doesn't look as attractive. The pricing just won't work for retail."

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