Goldman Sachs’ leveraged buffered notes linked to S&P 500 index are designed for pure bulls

By Emma Trincal

New York, Sept. 11 – Goldman Sachs Group, Inc.’s 0% leveraged buffered notes linked to the S&P 500 index have the potential to outperform in a bull market due to the absence of a cap on the upside and the presence of a “generous” buffer on the downside, said Suzi Hampson, structured products analyst at Future Value Consultants.

The notes will mature five years following pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.1 to 1.2 times any index gain. Investors will receive par if the index falls by up to 25% and will lose 1.3333% for every 1% decline beyond 25%.

“This is the perfect product in a bullish scenario,” she said.

“You don’t have a cap, and you still have some leverage, although not much. The notes are designed for aggressively bullish investors who want the full upside,” she said.

The product is scored against its peers within the same product type category, which in this case is the leveraged return category, according to Future Value Consultants’ methodology.

Riskmap

The product has a risk level comparable with its peers, according to the firm’s research report.

Future Value Consultants assesses the risk associated with a product by adding two risk components, market risk and credit risk. The resulting riskmap measures risk on a scale of zero to 10 with 10 as the highest level of risk possible.

The notes have a 3.15 market riskmap versus an average of 3.28 for the product type, according to the report.

Hampson mentioned duration as a factor.

“Most of these products are usually shorter. So despite the absolute amount of the buffer, which is quite significant, there is a greater likelihood for the index to move,” she said.

“Some investors perceive a longer-dated note as being less risky, but it may just be a gut feeling.

“In terms of pricing and simulated analysis, the longer you are invested, the more risk you get. It’s true for credit risk but also market risk. The chances of big losses are higher because you have more time for the underlying to move or fall by a larger amount.”

Another risk factor is the downside leverage.

“If you fall under the buffer, you can lose a significant amount of capital due to the gearing,” she said.

“The 1.33 leverage multiple is calculated to take you down to zero, worst-case scenario.”

Despite those two factors, the market riskmap ends up lower than average mainly due to the size of the buffer, she said.

Credit riskmap

On the other hand, the credit riskmap at 0.81 is higher than the average of 0.56 for similar products, according to the report.

“It’s a five-year, so of course you will get more exposure to credit risk. The issuer’s credit is also part of the story,” she said.

The five-year credit default swap spreads for Goldman Sachs are 93 basis points, according to Markit.

Goldman Sachs has some of the widest CDS spreads among top U.S. banks followed by Citigroup with 86 bps and Morgan Stanley at 84 bps.

Return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets, and high- and low-volatility environments.

A risk-adjusted average return for each assumption set is then calculated. The return score is based on the best of the five scenarios.

The notes have a return score of 8.70 while the average for the product type is 7.86.

“It’s very good,” she said.

“According to our methodology, we picked the bullish scenario to compute the score, and this product is really suited for that type of market. In a bullish market, this note is perfect. It will outperform the index.

“This is not your typical leveraged product. More often, leveraged notes are shorter and offer more leverage but that comes with a cap. The idea is to maximize returns in moderately bullish market.

“This product is geared toward more bullish investors. There is no cap. You get full exposure to the gains in the underlying.

“This product will benefit from a strong growth scenario, especially over a long period of time.”

Price score

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

At 8.51, the price score is “much higher” than the 6.16 average for the leveraged return category, she noted.

“It’s an impressive price score,” she said.

“The note could be competitively priced on its own, but the five-year term definitely helps too as fees are spread over a longer period of time than average.”

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The notes scored 8.60 on the overall scale versus an average of 7.01 for the product type.

“It’s coming out very well in our ratings,” she said.

“The risk-adjusted return and the pricing are well above average.

“It stands out for a specific group of bullish investors who don’t want to be capped.”

Goldman Sachs & Co. is the agent.

The estimated initial value of the notes is expected to be between $955 and $985 per $1,000 principal amount.

The Cusip number is 38148TEJ4.

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