Countering the volatility of the underliers, GS’s $6.87 million autocalls offer defensive tilt

By Emma Trincal

New York, June 8 – GS Finance Corp.’s $6.87 million of autocallable contingent coupon equity-linked notes due June 4, 2026 linked to the stocks of Apple Inc., Amazon.com, Inc. and Tesla, Inc. present obvious risks given the current bear market hitting high-growth stocks, sources said. But the deep barrier and post-sell-off valuations of the three underlying stocks should bring some comfort to income investors seeking equity-like returns, they noted.

The notes will pay a contingent monthly coupon at an annual rate of 21% if each stock closes above its coupon barrier price, 60% of its initial price, on a related determination date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus the coupon if each stock closes at or above its initial share price on any quarterly observation date after one year.

If the notes are not called and the final share price of each stock is greater than or equal to its coupon barrier, the payout at maturity will be par plus the final coupon.

If the worst performer finishes below its coupon barrier but at or above its 50% final barrier, the payout at maturity will be par. Otherwise, investors will be fully exposed to the decline of the share price of the least performing stock from its initial level.

Nosedive

“You’re getting the right amount of defensive posture against the stock market sell-off,” a market participant said.

“All three names are volatile. This deal for sure is not for the panicky investor. Everyone was piling in tech last year, and now tech is in bear market territory.”

The Nasdaq is down nearly 23% year to date.

“But Amazon, Apple and Tesla have already dropped a lot from their previous highs,” he added.

Apple is down 19% from its January peak, Amazon.com shed 36% from its July high and Tesla is 42% off its November high.

“You do have a 50% barrier from those levels. I think it’s a good story,” he said.

“If you want some high income while protecting your downside instead of being down one for one with the stock, that’s a good option. It resonates with investors’ search for income and protection.”

Contingent yield

The 60% coupon barrier increased the odds to earn the coupon, he added.

“It’s not a bond, but you would have to take another 40% loss to miss your coupon. It doesn’t seem very likely, and that should probably give you a sense of comfort,” he said.

Each company was a “leading business with top management,” he said.

“The recent market turbulence is scary for most investors. But it’s hard to imagine another 50% or 40% drop. So, if you have the desire to jump on the opportunity, you’re probably getting in a the right time,” he said.

Four-year term

This market participant was comfortable with the four-year tenor.

“It’s OK. Remember, it’s callable. Your duration is more likely to be one year than four. If rates are going up, it pays not to buy long-term paper.”

On the other hand, if the notes mature, investors may have enough time to see the market recover.

“Four years should allow for a normalization of your return,” he said.

An industry source said his “only criticism” may be the term.

“It’s a pretty common structure. The difference I think is the four-year tenor, which is a little longer than usual. You just have to have clients willing to go beyond three years,” he said.

Margin of safety

“Amazon did its 20-for-1 stock split on Monday. But it doesn’t change anything to the fact that the stock has already been down for months. Tech stocks took a hit, and that gives you a pretty good cushion.

“Apple is much more stable than the other two. It might get banged up a little bit but not like Amazon.

“Tesla is very volatile. With [Elon] Musk buying Twitter, many people think he’s going to have to sell shares of Tesla. Whether that’s true or not, it hasn’t been good for the stock.”

Tesla’s share price dropped 28% since April 25 when Twitter’s board of directors agreed to Musk’s $44 billion buyout offer.

“Despite the volatility of these heavyweights, you still have some margin of safety on the downside with the much lower entry prices and the 50% barrier. With a 21% return, this note seems reasonable to me.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes settled on Monday.

The Cusip number is 40057M4K2.

The fee is 0.7%.

© 2015 Prospect News.
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