Goldman's $24.32 million notes on MSCI All Country offer broad, rare underlying, big buffer

By Emma Trincal

New York, June 9 - Goldman Sachs Group, Inc.'s offering of leveraged buffered notes tied to a diversified global equity index was the most popular deal last week due to the breadth and originality of its underlying index as well as its unusually high buffer, sources said.

Goldman Sachs priced $24.32 million of 0% leveraged buffered index-linked notes due June 10, 2013 linked to the MSCI All Country World index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 105% of any index gain. Investors will receive par if the index declines by 30% or less and will lose 1.4286% for every 1% that it declines beyond 30%.

First-time use

This is the first time the underlying for the notes, the MSCI All Country World index, has been used in an offering, according to data compiled by Prospect News. Other structured products have been linked to sub-indexes of this benchmark but not to the MSCI All Country World index itself.

The MSCI All Country World is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets.

It consists of 45 country indexes, comprising 24 developed market countries and 21 emerging market countries. The index is also diversified across 10 sectors.

So far this year, the index, as measured by the iShares MSCI ACWI exchange-traded fund, has posted a 9.35% loss. However, the fund gained 6.95% over the past 12 months.

85% of the world

Besides the appeal of a little-known index, investors were attracted to the diversification that the underlying provides. The MSCI ACW index is a capitalization-weighted index that aims to capture 85% of the publicly available total market capitalization.

"The underlying explains the excitement," said Brad Livingston, a distributor at Laidlaw & Co.'s Income Solutions Group. "People are looking at global assets, and there is always the allure of developing countries coming out of the crisis with solid growth potential."

Big buffer

Noting that the product is not capped, Livingston said, "The 105% leverage on the upside is OK. It's adequate. But it's the 30% buffer that makes it attractive."

"They're giving you that 30% protection. That's where the carrot is," Livingston said. "Forty-five countries over the next three years shouldn't go down more than 30%."

The benefit of the extra protection offered by the 30% buffer largely offsets the fact that the upside leverage is modest and that investors will lose more than 1% of principal for every 1% of index decline beyond the buffer, sources said.

The 1.4286% leverage factor on the downside is simply a function of the larger buffer. In theory, investors incur the risk of losing their entire principal if the index declines by more than 30%.

Long-term play

Sellsiders said that in periods of uncertainty and increased volatility, leveraged notes are appealing to investors who are neither highly bullish nor bearish.

A sellsider said that investors take on additional risk with leveraged notes, even when buffered, because investors remain at risk of losing their entire principal and that risk increases at a faster pace once the 30% barrier is breached.

But this sellsider said that investors are willing to take the chance of such possible outcome now as most bearish anticipations remain limited to the short term.

"People rationalize it by anticipating that the market will recover by the time the notes mature, which in this case is three years from now. And the leverage factors are small," this sellsider said.

Goldman, Sachs & Co. is the underwriter.

Fees are 0.25%.

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