GS Finance’s $5.5 million callable notes on S&P 500 offer monthly range accrual coupon, buffer

By Emma Trincal

New York, June 3 – GS Finance Corp.’s $5.5 million of callable buffered monthly range accrual notes due May 29, 2025 linked to the S&P 500 index pay a coupon via a range accrual formula, a type of payout that has not been very popular of late although the structure has been around for decades.

Interest will accrue at an annualized rate of 5.2% for each day that the index closes at or above the 85% coupon barrier, payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable at par on any interest payment date after one year.

If the notes are not called, the payout at maturity will be par unless the index finishes below 80% of its initial level, in which case investors will lose 1% for every 1% decline of the index beyond 20%.

Accrual formula

“It’s like a callable reverse convertible. But instead of having a fixed rate, your coupon is based on a range accrual barrier,” said a market participant.

With other income deals, the coupon is defined in advance whether it be fixed or contingent, he noted. With this note, the amount of coupon will vary based on the accrued interest formula.

“You have to accrue. It’s not a one-touch,” he said.

“You could get anywhere from 0% to 5.2% on any given year.

“It’s just another way to pay a coupon. People buy it thinking hopefully I’ll get every single day although there’s no guarantee.”

Pricing

This market participant was not impressed by the coupon.

“I’m sure they priced it right. But it doesn’t look like a very good rate.

“The range accrual, the discretionary call, all that should give you a higher rate,” he said.

Other factors however could play against a strong coupon.

“It’s on the S&P only. It’s not a worst-of. A worst-of would give you a better yield than that,” he said.

“You also have a 20% buffer, and that’s expensive.

“Also, even though it’s an issuer call, you get a one-year no call. So, you can count on having some income for at least one year if there is income.

“It’s all tied in together.”

Alternative investment

As with most income-oriented structured notes, the product had hybrid characteristics.

“It’s a typical alternative investment,” he said.

“It’s not really an equity play. You don’t get to participate. You can’t allocate. It’s tactical.

“It’s not fixed income either. You don’t know what your income is going to be. You can lose money.

“It belongs to a very small portion of the portfolio, the alternative investment portion along with real estate and commodities.

“Given that and also the fact that the coupon is not that high, it didn’t raise a lot of money.”

Less common

An industry source said he “did not like” the deal.

“I see less demand for range accrual in general. They’re harder to explain. Having a set number of observation periods makes it easier to communicate,” he said.

“When you sell structured notes, you don’t want to add complexity for the sake of it. First, the client has to be able to understand it. Presumably, people want a higher coupon. But this 5.2% rate does not strike me as competitive at all.

“I’m not sure why people would be buying that.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes (Cusip: 40057EAQ0) settled on Friday.

The fee is 3.85%.

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