Goldman Sachs to price 2.34% buffered notes tied to S&P 500 for income and growth investors

By Emma Trincal

New York, March 22 - Goldman Sachs Group, Inc.'s upcoming 2.34% buffered index-linked notes due Nov. 1, 2018 linked to the S&P 500 index present an unusual structure that is attractive to investors looking to get both income and growth potential, sources said.

Interest will be payable on Nov. 1 of each year, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any index gain. Investors will receive par if the index declines by no more than 25% to 30% and will lose 1.4285% to 1.3333% for every 1% that it declines beyond the buffer.

The exact buffer and buffer rate will be set at pricing.

Goldman, Sachs & Co. is the underwriter.

Downside exposure

"It has a geared buffer, but I don't think this is negative enough to keep you from doing it. I've done geared buffers in the past if the terms were attractive enough. And this is a pretty nice deal," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management in Atlanta.

By "geared buffer," Wright referred to the fact that investors will incur more than a point of losses for each 1% of the index's decline beyond the buffer.

Different

"It's already difficult now to find deals that offer a 15% to 20% buffer. So 25% to 30% is unusual," Wright said. "Here, the coupon is unusual, the 25% to 30% buffer is unusual, and the fact that returns are uncapped is unusual."

Long-dated maturity

Wright, however, pointed to what he saw as perhaps the only shortcoming of the notes: their long-term maturity.

"Generally, I stay pretty short. I go anywhere between 18-month to three-year. This is well over twice as long as what I'm used to buying. So there is that. But it sounds pretty good if you can afford to tie your money to eight-and-a-half years."

But the long-term maturity and the "geared buffer" are not a "deterrent," said Wright, who added that such disadvantages are offset by the size of the buffer.

"A 25% buffer is large enough to limit the odds of going beyond that buffer. It's an acceptable risk," he said.

Long-term income

Suzi Hampson, structured products analyst at Future Value Consultants, said, "I can't think of seeing anything comparable to this. This is a very unusual product in that it is similar to a long-term fixed-income product and yet, it is different because a long-term income product does not offer growth at the end."

While the notes offer a fixed coupon, Hampson noted that "this eight-year rate is below the risk-free rate."

The 10-year and seven-year Treasury bonds have 3.625% and 3% yields, respectively.

Expectedly uncapped

Hampson also said that the absence of a cap was not surprising because the product does not offer any leverage on the upside. "On a one-for-one product, you don't see caps, especially for an eight-year," she said.

Buffer and tenor

Hampson put in perspective the buffer amount.

"With this kind of structure, you don't see a lot of 25% to 30% buffers, that's true. But also you don't see a lot of eight-year term products," she said.

She said that many one-year products tend to have a 10% buffer. Most structured products have a one- to two-year term with a 10% to 15% buffer, she added.

"This is so much longer that you need more protection. The 25% to 30% buffer does not surprise me because you should expect to have more than [a] 10% to 15% buffer in an eight-year product," she said.

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