GS Finance’s leveraged notes linked to Dow industrials offer return enhancement on both sides

By Emma Trincal

New York, March 3 – GS Finance Corp.’s 0% leveraged notes due March 25, 2019 linked to the Dow Jones industrial average give investors a chance to outperform both on the upside and on the downside, sources said. By combining an absolute return feature and upside leverage, the notes should appeal to a wide range of investors, they noted.

If the index return is positive, the payout at maturity will equal par plus 1.5 times the return, subject to a maximum return of 34.5% to 40.5%. The exact maximum return will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 20%, the payout will be par plus the absolute value of the return. If the index falls by more than 20%, investors will be fully exposed to the decline.

Rare leverage

“Down up to 20%, you outperform. That’s nice,” said Steve Doucette, financial adviser at Proctor Financial.

“But this one is different. They lever up the upside, which is rare for those products.”

Most absolute return notes, also called dual directional notes, indeed offer one-to-one upside up to a cap. The return enhancement is typically limited to the downside. Sometimes enhanced returns are provided via a digital payout on the upside, but leverage is less common, according to data compiled by Prospect News.

Cap

“This cap of 11.5% to 13% a year is pretty good too. You get more on the upside on this one.”

In many cases the cap and the barrier are at approximately the same distance from the initial price, according to the data.

“As we talk in the investment community about the new normal, between 6% and 8% a year rather than what used to be 10% to 12%, this cap allows you to really outperform on the upside if returns are moderate.”

The range of possible gains on the downside is not negligible, however, he added.

“The absolute return component could be huge if we’re in the middle of a bear market. We don’t know when this bear market is going to come, but we know it’s coming,” he said.

“Worst-case scenario, you’re long the index. But at least you don’t have to sacrifice the upside.

“I like this deal.”

Trendy

Matt Medeiros, president and chief executive of the Institute for Wealth Management, noticed the increased presence of absolute return products.

“It’s interesting. We’re seeing more absolute return types of strategies in the structured note space as of late. I think that’s great for the purchaser,” he said.

Absolute return products are valuable in volatile markets.

“When markets are very choppy, absolute return notes give investors a good sense of security knowing that they don’t have to rely on market timing.”

As investors can generate returns in up or down markets, they have the “confidence to stay in the asset class,” he said.

Having a barrier observable at the end of the three years is another comforting factor for investors.

“The point to point is nice. It gives the investor a little bit more flexibility, and it minimizes the possibility of piercing the barrier,” he noted.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. is the agent.

The notes will price on March 18 and settle on March 28.

The Cusip number is 40054K4F0.

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