GS Finance’s $1.56 million notes on MSCI basket offer short-term play on international equity

By Emma Trincal

New York, Feb. 17 – GS Finance Corp.’s $1.56 million of 0% buffered notes due Aug. 15, 2023 linked to a basket of MSCI equity indexes offer attractive terms to investors seeking short-term exposure to non-U.S. markets, advisers said.

The equally weighted basket consists of the MSCI EAFE index and the MSCI Emerging Markets index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 150% of the basket return, subject to a maximum payout of par plus 22.2%.

Investors will receive par if the basket finishes flat or falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

Outperformance

“It’s amazing they’re getting that range out of these notes on such a short term,” said Steve Doucette, financial adviser at Proctor Financial.

He meant the minus 10% to plus 22.2% range within which investors will outperform the price return of the basket.

“It’s a nice, straightforward note with a high cap and a 10% buffer.

“There’s an awfully good chance to outperform with this note. The only time you don’t is if you’re capped out at 22.2%. That’s 14% a year. Who’s going to complain about 14% a year?” he said.

Changing environment

Doucette said he has recently observed a change in the pricing of notes that issuers are bringing to the market.

“I’ve seen more attractive notes lately. Anytime volatility is up there, you’re going to get more downside protection, higher caps just like this one.

“If you can get into a note like that with a short maturity, take it,” he said.

If the deal had not already priced, Doucette said he would have considered the notes for his clients’ portfolio.

“We have an emerging market note due next month. We will look into that,” he said.

This adviser added that it was surprising to see such a deal over an 18-month period.

“Usually if you want to catch that leverage you have to go a little longer especially with a straight buffer, and it’s not even a worst-of. Here you get a decent upside, not just the leverage but also the cap, which is very attractive,” he said.

Value

Doucette also liked the two basket components.

“These international markets have been underperforming. You might miss out a little bit on the upside. But again, with 14%, who’s going to be unhappy about that?

“It’s also a basket, not a worst-of. That’s also good.

“You’re going to get a balanced exposure to two international asset classes versus a U.S. stock market that’s a bit overextended.

“It’s a nice exposure to have assuming the market reverts to the mean. It always does. It just didn’t happen in 10 years,” he said.

The short duration was also a positive aspect of the deal.

“If you get a three year, the protection may become irrelevant. But on an 18-month, it matters. You wouldn’t want to cap your upside on a three- or five-year note. But here, it’s unavoidable. They just picked a very decent level for the cap.

“I like it.

“It’s a reasonable way to outperform in either direction,” he said.

Acceptable cap

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also expressed a positive view on the security.

“Interesting note.

“While Europe and the emerging markets are undervalued to the U.S., it’s nice to have a 10% buffer.

“Typically, I’m opposed to having caps on the upside. But for a short period of time, I think the cap is in line with a bullish sentiment on these asset classes,” he said.

Medeiros said he avoids buying worst-of notes in general. The diversification offered by a basket was welcomed.

“The basket mitigates your risk instead of adding more risk.

“The fact that it’s diversified makes it even more interesting.

If the same deal was structured around the worst of the two indexes, the short duration would have been a real obstacle, he said.

Geopolitical risks

Exposure to developed and developing equities presents different risks than investing in the domestic stock market, he noted.

“Obviously anytime you have international market exposure, you’re going to have risks, especially political risks. If something happens in Ukraine for instance, the stocks in the basket would turn much more volatile.”

The MSCI EAFE index has a heavy exposure to European stocks, with a weighting of more than 60%, he noted, which reinforces the risk associated with a potential war between Russia and Ukraine.

“I’m cautiously bullish on the two ETFs. If there is political or civil unrest in one of those regions, volatility will pick up.

“Obviously you can’t rule out geopolitical factors.

“But looking at those funds from a valuation standpoint, it’s interesting.

“It’s a good note,” he said.

Goldman Sachs & Co. LLC is the agent.

The notes settled on Tuesday.

The Cusip number is 40057L2U4.

The fee is 0%.

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