GS Finance’s $22.69 million autocallable buffered notes on S&P 500 offer hybrid payout

By Emma Trincal

New York, July 13 – GS Finance Corp.’s $22.69 million of 0% autocallable buffered index-linked notes due July 6, 2027 linked to the S&P 500 index allow investors to earn a double-digit return if called after one year or to obtain enhanced returns at maturity. The outcome, which will either be income or participation, is market-dependent and unpredictable, sources said, making the hybrid security somewhat challenging for asset allocators.

The notes will be automatically called at par plus 13.21% if the index closes at or above its initial level on July 1, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index return is positive, the payout at maturity will be par plus 1.2 times the index gain.

Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% loss beyond 20%.

Double-digit premium

“13% is a nice play for one year if the market is flat. If it’s down, you’re locked in for three more years. It’s really a timing play,” said Steve Doucette, financial adviser at Proctor Financial.

“You may get called and miss some of the upside. But that’s all right if you’re happy with 13%.

“If you miss the call, the no-cap plus 1.2x leverage is not a bad thing.

“Now do you really need a 20% buffer over four years? I don’t know.”

Doucette’s objection with the structure of the note, dubbed “catapult” in the industry, pertained to the difficulty in allocating it to the right portfolio’s bucket.

Hybrid

“My problem with these notes is: where do you put them? It’s hard to fit those products into your asset allocation,” he said.

“We use those autocalls as part of the fixed-income portfolio. You can get a high coupon. A lot of those notes have outperformed fixed-income instruments. It’s a great alternative.”

But these notes with two distinct possible payouts make the allocation decision more challenging.

“What are the odds of getting called in one year? Who knows?

“Is it going to be income or growth? It’s one of those hybrid notes. You don’t know where it goes in the portfolio,” he said.

Reengineering

Since the automatic call may introduce uncertainty and limit the upside, Doucette said he may try and get rid of the call feature.

“I’d have to see how I can keep the upside payout at maturity,” he said.

If the goal is to obtain uncapped leveraged exposure, a four-year maturity should offer various options, he said.

“What else is out there? You might have to talk to the issuer. Perhaps after you do, this note will look a little bit silly,” he said.

A million ways

In a recent discussion with a bank, Doucette said he was offered a five-year note tied to three U.S. indexes (Nasdaq, Russell 2000 and Dow Jones industrial average). The five-year maturity and worst-of payout allowed him to get 1.72 times leverage on the upside with no cap and a 70% barrier on the downside.

“There are a million ways in between.”

Two weeks prior to issuing the notes, GS Finance priced $3.24 million of a very similar note. The tenor was longer, extended to five years, and the leverage much higher at 2.25 times. The annualized call premium was 10% payable on a call date set two years after issuance as a 20% premium. The protection on the downside was a 70% barrier.

“In just two weeks...those two notes are far apart. I guess it all depends if you want more leverage or more premium. But you have to do your due diligence. When we know what we’re looking for, we put it out there, have the issuers compete with each other. You have to get the best pricing,” he said.

Premium, buffer

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes were a good match for the current market environment characterized by uncertainty.

“I like this note. It’s pretty straightforward, which is appealing to me,” he said.

“There is a good probability that the note will be called at the end of the year.”

This would mean earning a 13.21% annual return over a one-year duration.

“This would be totally acceptable to me. I wouldn’t be disappointed if the index outperformed the cap. The return is satisfying knowing that I have the buffer if I’m not right over that one-year period.”

Although geared, the buffer was large enough in size to make this adviser comfortable.

“20% is a good buffer. That’s where it should be,” he said.

The four-year tenor was also a positive.

“Over that timeframe, you’re unlikely to find yourself underwater,” he said.

Balancing act

Medeiros said he liked autocallable structures such as this one, which come with a single call.

“I like it better. Having this call after one year, rather than having to pay attention to it every month or every quarter is preferable, I think. It’s much easier to manage,” he said.

The premium was attractive as well.

“It may be a cap. But it’s a decent return. We’re not in this kind of market when you’re trying to get greedy. You want to get some upside and some protection at the same time. And there is a balance here,” he said.

Some markets require maximizing the upside, he added while others demand a greater focus on the downside protection.

“We’re in between right now. The market could go either direction at this point.

“The note is well suited to this environment,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on July 6 and priced on June 30.

The Cusip number is 40057TAZ7.

The fee is 0%.

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