Goldman Sachs to price ‘straightforward’ buffered notes due 2018 linked to Russell 2000 index

By Emma Trincal

New York, May 21 – Goldman Sachs Group, Inc.’s 0% buffered Russell 2000 index-linked notes due June 1, 2018 offer a simple structure to investors seeking exposure to the U.S. small-cap market, sources said.

At maturity, if the index return is positive, investors will receive par plus the gain, subject to a 41.25% cap, according to a 424B2 filing with the Securities and Exchange Commission.

On the downside, a standard buffer protects the principal to up to a 15% decline. Investors will lose 1% for every 1% decline in the index beyond the buffer amount.

Market exposure

“This is a straightforward note,” said Steve Doucette, financial adviser at Proctor Financial.

“There is no upside leverage, but you get up to 41.25%. That’s a decent cap.

“You’re not outperforming on the upside, but you get some market exposure plus a 15% protection in case of a pullback. And it’s a straight buffer with no gearing.”

Doucette said he would not make a call on the direction of the market three years from now, although the likelihood of a correction increases based on the length of the current bull market and historical performance.

At the same time, no one knows when a downtrend may occur and how severe the correction may be.

“I’m not necessarily bullish over three years. But you get the exposure in case the momentum continues,” he said.

“You have the protection and the high cap on the upside. And that’s a high cap: 13.75% ... I almost equate that with no cap.”

Market value

Doucette said that some products offer better prospects in terms of early redemption than others.

“This is also the type of structure you may be able to sell prior to maturity if the market goes well, unlike other types of deals, like an autocall for instance. The autocall will get called, and you may miss a good chunk of the market performance,” he said.

“My philosophy is that those notes don’t have to be held to maturity. You have to revisit a note on a regular basis and see if it still makes sense based on what the market is doing and what your client wants at that point.

“If the market has rallied, you may want to sell it to the issuer and get a better protection.”

He gave an example: “We’re actually up 20% on a note right now. It’s 1.5 times leveraged. We’re halfway into it. We’re not going to get 30%. But we may get 26%. The exchange will be somewhere between 20% and 30%.”

Upside

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, said he does not like the cap for this particular asset class.

“I like the Russell as an underlying index. It has become more attractive than it has been in the last few years,” Medeiros said.

“I also like the 15% buffer over the three-year period.

“But I’m not sure I would purchase it with a cap even though it appears to be a relatively generous cap.

“It’s an asset class that I like. I wouldn’t be inclined to take the risk for the position and not be rewarded for its potential.

“Perhaps a similar structure with no cap would have to be a little bit longer. When you look at small caps, you kind of make a three- to five-year decision anyway. It may make sense to go out a little bit longer in order to get the full benefit of the underlier.”

Goldman Sachs & Co. is the agent.

The notes will price on May 27 and settle on May 29.

The Cusip number is 38148T3U1.

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