GS Finance’s $28.36 million autocalls on S&P 500 offer two-tier payout for income, growth

By Emma Trincal

New York, Feb. 7 – GS Finance Corp.’s $28.36 million of 0% autocallable buffered index-linked notes due March 5, 2026 linked to the S&P 500 index feature two types of possible payouts likely to meet income and growth objectives alike as well as short and longer-term investment goals, advisers said.

The notes will be automatically called at par plus a 12.17% call premium if the index closes at or above the initial index level on March 1, 2023, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index return is flat or positive, the payout at maturity will be par plus 1.2 times the index return. Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% loss beyond 20%.

Hogs and pigs

“The macroeconomic picture suggests more volatility ahead,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“The first question is: what are the odds that we will be up this time next year. If we’re up, you’re done. Then the second question is: are you a pig or a hog? Pigs get fed. Hogs get slaughtered. Can you live with 12.27% after one year? I can all day long. Some people can’t. They get slaughtered.

“If the market is up more than 12.27%, I’m OK with that.

“If it’s up 4%, that 12% works for me.”

Missed call

Kunhardt analyzed the second type of payout: leveraged participation with buffered downside protection if the notes mature.

“You don’t get called. It means that in a year, the market is lower than it is now.

“Now you have three more years to go before maturity. But that’s almost a full market cycle.

“What are the odds that the market will finish negative four years from now? You can’t tell. I can’t tell four months from now let alone four years. You have to look at the odds.

“Historically, over a four-year period, the odds are in your favor.”

Buffer

Kunhardt said he liked the notes except for the geared buffer.

“I don’t like those buffers especially when the gearing is bigger than the leverage on the upside. But you do have the 20% cushion and that’s a pretty robust protection,” he said.

“There is really nothing egregious about this note.”

A buysider said he liked the defensive style of the structure.

“It’s a great buffer.”

Yet the buffer may end up serving no other purpose than to provide peace of mind to investors, he added.

“In four years, you’re not going to be negative. I don’t see that happening. So, I don’t think you might need it.

“What do we have today? We have Ukraine. We have Covid. We have energy prices. I don’t think we’ll be in this environment four years from now.”

Perhaps the most desirable outcome would be the call at a 12.27% premium, he said.

“That would be great. You get 12.5% and no more risk exposure.”

This buysider conceded that he had a bullish outlook on the market.

“Some people have been calling the bear market for how long now? The stock market will continue to climb a wall of worries. At some point the bears will be right. Even a broken clock is right twice a day as the saying goes.”

“I like the note. It’s pretty good paper.”

Positive terms

Steven Foldes, wealth manager and founder at Evensky & Katz / Foldes Financial Wealth Management, also liked the notes but would need to modify some of its terms.

“It’s a very interesting note but we would want to make some adjustments,” he said.

On the positive side, he cited the call premium.

“The 12% coupon if the index is flat or up is a nice return. Given that it’s about 13-month, you get the long-term capital gains tax treatment, which is positive.

“We also like the fact that the return is linked to a single index as opposed to a worst-of. That’s also attractive.

“Finally, we are comfortable with Goldman Sachs’ credit.”

Tweaking

Foldes said he would need to change some of the terms however to emphasize the features that are important to his clients.

“First and foremost, we would need to bring down the term to three-year or even two, if possible,” he said.

“Four-year is typically longer than what we look for.

“If it’s a three-year we wouldn’t need a buffer, even if you only have two years to make it up when you miss the call. Having a buffer on a long-term note is not necessary.”

The entry point was favorable to investors, he added, noting that the S&P 500 index is already 7% off its all-time high of the start of the year.

“That’s another reason to consider getting rid of the buffer. We would give it up especially on a three-year, and instead, we would add some leverage. The leverage is necessary to make up for what you’re giving up – 1.4% a year – in terms of dividends.”

Alternatively, this adviser would look into raising the call premium as a tradeoff for giving up the downside protection.

“Getting called in one year isn’t an issue. In fact, it would be a pretty good outcome.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes settled on Thursday.

The Cusip number is 40057KT86.

The fee is 0%.

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