GS Finance’s jump securities with autocall on indexes offer competitive return, recovery play

By Emma Trincal

New York, March 22 – GS Finance Corp.’s 0% jump securities with autocallable feature due March 26, 2026 linked to the worst performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index provide a double-digit source of income with cumulative payouts and a long protection period, three features advisers said were appealing.

The notes will be called at par of $10 plus a call premium of 12.9% per annum if each index closes at or above its initial level on any quarterly observation date starting after one year, according to a 424B2 filing with the Securities and Exchange Commission.

Previously unpaid call premium will also be paid.

At maturity, if the notes have not been called and each index finishes above its 100% call threshold level, the payout will be par plus 64.5%.

If the worst performing index finishes below its initial level and declines by not more than 20%, the payout will be par.

If the worst performing index finishes below its 80% downside threshold level, investors will be fully exposed to the decline of that index.

Core allocation

Carl Kunhardt, wealth adviser at Quest Capital Management, said that while he typically avoids worst-of and autocalls altogether, he would make an exception with this note.

“I can see myself doing this,” he said.

“The coupon is attractive, and it’s tied to indices that are broad enough to be core.

“I’m always going to have U.S. large-cap U.S., U.S. small-cap and developed countries, which is mostly Europe. All three indices can stay in a pure core allocation environment.”

The 80% barrier was sufficient in his view, mainly because he expects the notes to be called early.

“A 20% protection is not a bad safety net. Obviously, a buffer is far better, but 20% is still good,” he said.

The barrier at maturity may not even be put to the test.

“My market expectation is that it’s really a year note. I don’t think you’re going to pass the first call,” he said.

Call protection

The structure allowed Kunhardt to overcome one of his main objections to autocalls.

“What makes it for me is the fact that you won’t get called during the first year. Unless one of the three indices is negative in one year, you can really bank on a 13% in one year. I think it’s the most likely scenario. I don’t expect to see any of those three indices down in one year,” he said.

Kunhardt said he has no patience with notes that get called at the end of the first quarter.

“I can’t really be bothered for three months, and that’s why I typically don’t do those autocalls.

“My timeframe is minimum one year except when I work on cash-flow strategies using short-term ladders. That’s the only time I do short term.

“But this one gives you a full year of return. I like that,” he said.

Correlations, valuations

Kunhardt was not overly concerned about the correlations between the indexes.

“For the U.S, even though the Russell is a small-cap equity index and the S&P, a large-cap one, the two indices are fairly correlated,” he said.

“The Euro Stoxx is positively correlated to the U.S., but there’s a lag in that they have different economic drivers because the ECB and the Fed don’t exactly walk hand in hand. However, they’re not on the opposite side of the street either. Same side but different steps.”

The risk of breaching the barrier depends on the likelihood of a bear market taking place in five years.

“By most standards, U.S. large caps are overpriced and overvalued. That generally signals some kind of correction,” he said.

“But I would have said the same five years ago. They were overpriced and overvalued then as well.”

The coupon barrier, if breached, does not preclude future payments thanks to the memory feature of the call premium.

“You can accumulate the payments. That’s an added bonus,” he said.

Overall, Kunhardt said he was comfortable with the barrier level.

“What I expect are lower returns. The U.S. markets have performed very well. They will revert to the mean, which doesn’t mean a bear market. We’ll just see more muted returns. As for Europe, they’re well below their historical mean, so I see better returns looking forward,” he said.

“The good news about this note is that the markets don’t have to be rising. Flat or slightly up is enough. The risk is if one of the indices is negative, which I don’t expect to happen.”

Fair cap

Jeff Pietsch, founder of Eastsound Capital Advisors, said that the call premium was attractive for an income investment.

“It’s a hybrid instrument. I like the income feature,” he said.

“Everyone is looking for income. Even if long-term yields are rising, interest rates are still historically low. Investors are seeking alternative investments that can generate income. So that’s interesting.

“Usually with those deals, the flip side is a low cap or low coupon. But 12.9% a year, I don’t find that terrible at all,” he said.

Short-term

Investors have a chance to outperform the market unless one of the indexes drops more than 20%. This adviser does not foresee such a scenario.

“We don’t expect a bear market. We’re in a recovery environment. The Fed is accommodative. I’m not too concerned about the downside,” he said.

The notes are likely to be shortened in duration, he added.

“It’s nice to have this call protection feature. Chances are in a year, you get called,” he said.

Economic rebound

The worst-of as always bring additional risks but also uncertainty.

“It’s hard to know which of the three will be the worst-of. Europe is in comeback mode. The Russell is still very volatile but so is the tech-heavy S&P,” he said.

Despite the worst-of, Pietsch believes the notes are likely to deliver a positive outcome, making the case for equity growth in this post-pandemic environment.

“This is a note that can still find its way in a high-net-worth portfolio,” he said.

“The economy is opening up. There are concerns about inflation, which I had predicted last year. But the Fed is committed to keeping rates low for a while. They provide enough support to soothe the markets for some time.”

The futures market is pricing no rate hike until 2023, he added.

“Since the Fed has a dual mandate not just on price stability but also on maintaining maximum employment, we know they may keep rates low even longer, as long as it takes to get these 10 million people back to work.”

The notes will be guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

Morgan Stanley & Co. LLC is the dealer.

The notes were expected to price on March 19 and to settle on March 24.

The Cusip number is 36259Y578.

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