Goldman’s autocallable contingent coupon notes on index, oil offer yield but not simplicity

By Emma Trincal

New York, Dec. 16 – Goldman Sachs Group, Inc.’s autocallable contingent coupon notes due Jan. 11, 2023 linked to the Russell 2000 index and the West Texas Intermediate light sweet crude oil futures contract can generate from 8% to 12% per annum in contingent coupon, but the structure is not necessarily easy to explain to clients, a financial adviser said.

If each underlying component closes at or above the 75% barrier level on a quarterly review date, the notes will pay a coupon at an annualized rate of 8% to 12% for that interest period, according to a 424B2 filing with the Securities and Exchange Commission.

The planned quarterly contingent coupon will be 2% for the first 16 quarters, 2.5% for the next eight quarters and 3% for the final eight quarters.

If each component closes at or above its initial level on any determination date, the notes will be called at par plus the coupon.

If one of the components falls between 50% and 25% of its initial price but the other does not drop by more than 25%, the payout will be par and no coupon will be paid.

If the return of either component is less than negative 50%, investors will share fully in losses of the worst-performing component.

Creative

“First, I applaud Goldman for their creativity in building this note,” said Dean Zayed, chief executive of Brookstone Capital Management.

“During a time of high stress in the ‘yield chase’ with asset classes like high-yield bonds under pressure, this is a rock solid yield note with incredibly attractive terms.

“While many are ready to accept oil falling to $40 a barrel, my strong conviction is that we’re going to see a bottom soon. Oil at 50 is simply not sustainable for a long time.”

Zayed said that he “would not be surprised” if oil prices moved back up to $100 a barrel 18 months from now.

“This note provides a great yield, a huge cushion to protect against principal loss at maturity, and it does so with two underlying assets that are likely to hold up very nicely with the terms of the note.

“I don’t see many ways you lose here as long as you are willing to potentially hold the note for eight years.

“In short, what’s really not to like about this for an investor seeking yield in a creative and non-traditional method?”

‘Mind-boggling’

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, had a different take.

“I wonder who the genius is at Goldman who came up with this stuff,” Foldes said.

“The idea of explaining that to a client is mind-boggling.

“Having to go through these iterations is almost a non-starter. If a, b, c, d, or e happens then you’re getting x payout.

“I’m not saying it’s not attractive but when you have that level of complexity, it’s nearly impossible.

“I’m sure the people who created this product are very smart. But they’re not dealing with individual clients who no matter how successful they are in their businesses are not CFAs or CPAs. That’s number one.

“Number two, eight years for us is just off the chart. This is very difficult unless the deal is exceptionally good.”

Yield stretch

Growth was also an issue.

“When you invest in these areas with potential for upside, you don’t want to do it for a relatively modest coupon,” he said.

“When we develop portfolios for our clients, we’re not necessarily looking for a coupon. Even for retirees who want income, we’re going to look for total return because growth is what’s going to fuel the cash flow our clients need.”

Even if the potential yield exceeds what many fixed-income instruments may deliver, Foldes said he does not use equity exposure to get income.

“If we look for coupon, it’s going to be in a fixed-income instrument, and for us, fixed-income is about capital preservation,” he said.

“We stay away from those equity-linked strategies stretching for yield because they put clients in harms’ way as it relates to credit risk and as it relates to duration.

“When we buy fixed-income instruments, we get what the instrument provides. With a manager’s skill we also hope to get some amount of appreciation. But it’s all about capital preservation, which is why we wouldn’t use equity exposure to achieve any kind of yield.”

The notes (Cusip: 38147QQ33) will price on Dec. 24 and settle on Dec. 30.

Goldman Sachs & Co. is the agent.

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