Goldman's $96.73 million notes tied to Dow Jones - UBS Commodity index seen as cost-efficient

By Emma Trincal

New York, April 3 - Goldman Sachs Group, Inc.'s $96.73 million of 0% notes due April 10, 2014 linked to the Dow Jones - UBS Commodity index intrigued market participants for its large size and simple structure. The low fee was assumed to have driven the large bid.

The delta one product offered at maturity a payout of par plus the index return, with investors sharing in any losses, according to a 424B2 filing with the Securities and Exchange Commission.

Commodities have been on the rise lately, sources noted.

Issuance of notes linked to the asset class doubled last month compared to February, according to data compiled by Prospect News.

But the main reason for the large size of the deal, which priced last week, was probably more related to cost, the sources noted.

"It's not like there are no alternatives. There are no ETFs on this index, but you have two ETNs," an industry source said.

One is Barclays Bank plc's iPath Dow Jones - UBS Commodity Index Total Return ETN with a 75 basis points fee. The other is UBS AG's Etracs DJ - UBS Commodity Index Total Return with a 50 bps fee.

"I see no advantage in using this note versus an ETN because you don't have the liquidity. However, what you have is a much lower fee, and that must have been the driver," he said.

The underwriting fee was 10 bps, according to the prospectus.

"Sometimes a bank tries to underbid an existing product from a competitor," a market participant said.

"Banks compete with exchange-traded products providers. This type of deal may represent a way to directly compete with them.

"Maybe they had that opportunity. Somebody would like to invest, somebody who seeks exposure to the Dow Jones - UBS Commodity benchmark.

"This would have to be a large institution, someone who can buy $1 million in one go.

"They probably asked Goldman for a special product because the fee structure used for retail didn't suit them. It's too expensive.

"The bank will issue a note and run it at a lower price. The client buys a cheaper product. The bank get less in fee, but they make it up on the volume."

Likely institutional

A sellsider agreed with the idea that the product's large size was the result of its low cost.

"It's probably an institution," this sellsider said.

"It's hard to say why you had almost $100 million on a simple product like that. It could be the fees or the desire to take exposure to this index.

"What's weird though is the $96.73 million number. It's not an even number. That's unusual for that type of client.

"Normally, you would sell to an institution at par, not at a discount. Maybe some kind of commission was being paid."

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said that the low cost may have been the appealing feature. However, it would not have been a selling point for him.

"First, we don't invest in the broad commodity market. We are selectively choosing," he said.

"We think that long term, the more robust economy will be good for commodities even if some sectors like precious metals remain under pressure in the short to mid term.

"But back to this note, I can't find any reason why someone would buy this for such a huge size.

"It's a tracker. You have no compelling features. By investing in a structured note, I want to see some benefits either in the form of upside leverage or downside protection.

"If only you had a put built in. But that's not even so, otherwise it would be in the prospectus.

"To lock up my money - OK, it's not a complete lock-up - but to restrict my clients' liquidity without any bonus is beyond me."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.