GS Finance’s barrier early redeemable notes on S&P offer full protection for short-term bears

By Emma Trincal

New York, Aug. 14 – GS Finance Corp.’s 0% bearish barrier early redeemable market-linked notes due between Aug. 16, 2021 to Oct. 18, 2021 with daily barrier observation linked to the S&P 500 index offer several ways to play a correction or down market with a minimum return and principal guaranteed.

If the index closes below the barrier, 75% of the initial index level, on any day during the life, the notes will be automatically redeemed at par plus 1%, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not automatically redeemed and the index return is greater than or equal to zero, the payout at maturity will be par plus 1%.

If the index return is less than zero but the final index level is greater than or equal to the barrier, the payout will be par plus the absolute value of the index return.

If the final index level is less than the barrier, the payout will be par plus 1%.

Mildly bearish

The structure is bearish but not exceedingly bearish: investors will make money only if the index never drops more than 25% and finishes down by less than 25%.

“The sweet spot is if you finish down close to 25% without ever breaching the 25% threshold,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

This would be the ideal scenario as it would give investors access to the absolute return feature with a potential gain of up to 25%.

“This is probably not very likely to happen. But the structure offers other ways to earn a good return. After all, the absolute return range goes from 0 to 25%,” he noted.

1% payout

If the market turns out to be more bearish during the next 24 to 26 months causing the index to breach the barrier, the notes will be automatically called. The principal will be fully returned and investors will receive a small 1% payout.

For a truly bearish investor, the odds for such scenario are high, making the perspective of a mediocre return the most likely outcome, a market participant said.

“What are the odds that you’ll finish down but without ever falling below the barrier in the next two years? It looks like you’re on your way to get the 1% and that’s it. That’s a little thin.

“I don’t see enough of a reward here,” he said.

Full protection, short-term

Pool disagreed. He said the investment, which he considered as a cash instrument with potential equity returns, was an adequate way to navigate a volatile market.

“Even if 1% is a low bonus, you still earn something when the market is down,” he said.

“If the market gets really bad within the next two years, you won’t lose anything. Small gain but no losses.”

The mere possibility of having full principal protection over a two-year period was intriguing.

“If you’re looking at it from the perspective of finding an investment vehicle that offers full principal protection going out two years, it’s quite attractive. What are the options out there?”

Two-year standard certificate of deposits may offer yields at or below 2%, he said.

“Compared to that, you’re only getting 1%, so half of the CD yield. But you have the ability to make up to 25% if the market can stay within that 25 points range,” he said.

American barrier

Finally, the nature of the type of barrier used to trigger the call offered its own benefits. The barrier used in this structure is known as an “American” barrier as it is observed on any day during the life of the securities. American options since they can strike much more often make the call more likely to happen. In the same vein, the odds of a very early redemption are higher too, observed Pool.

“We can’t rule out a bear market in the very short term,” he said.

“The market drops 25% in the next month, you get called with 1%. That’s a 12% annualized return. The earlier the redemption, the higher your return on an annualized basis.”

Cash allocation

Pool said he could recommend the notes to conservative investors seeking to make their money work for them in a down market.

“It would be appropriate as a cash substitute. You will get at least 1% and you may get it sooner than later,” he said.

“With interest rates coming down, what seems like a low yield today may become more attractive down the road.”

But more than cash, the notes are an interesting way to play the potential resurgence of a bear market, according to this adviser.

“You do have the option to get quite a little bit more than 1% and your principal is fully protected on the downside.

“For someone trying to mitigate risk, I think it’s appropriate.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter. UBS Financial Services Inc. is acting as selling agent.

The notes will price on Friday.

The Cusip number is 40056FZX6.

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