Sources compare traditional and modern type of autocalls with GS Finance, TD Bank deals

By Emma Trincal

New York, Aug. 3 – Issuers last week priced two very different autocallable notes offerings. But the differences exemplified the diversity of uses and variety of pricing seen with these products, which are no longer used just for income, sources said.

The first one was GS Finance Corp.’s $71 million of 0% autocallable index-linked notes due Jan. 29, 2026 tied to the Nasdaq-100 index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus a 15% call premium if the index closes at or above its initial level on July 26, 2023.

If the notes are not called, the payout at maturity will be par plus 1.4 times the index return if the index finishes at or above its initial level.

If the index declines by up to 20%, the payout will be par; otherwise, investors will be fully exposed to the decline of the index from its initial level.

The second deal – Toronto-Dominion Bank’s $18.81 million – was a classic snowball structure. The 0% Strategic Accelerated Redemption Securities due July 28, 2028 linked to the S&P 500 index will be called at par plus a premium of 11.1% per year if the closing level of the index is greater than or equal to its starting value on any annual observation date.

If the notes are not called, investors will lose 1% for each 1% decline in the index.

Tenor vs. call frequency

“Those are two very different deals. Almost apples and oranges. Two different prices, indices, terms, number of autocalls and payouts,” said an industry source.

“It may seem strange that the three-and-a-half year one offers a 20% barrier while the six years has no protection whatsoever.”

But the six-year note has six annual call dates.

“In general, autocalls tend to benefit the buyers. It gives them an opportunity to make money and to exit at par. The shorter note on the other hand only has one call. If you’re not called out after one year, you still have risk.

“That in a way justifies the barrier. The other one has no downside protection, but you have six exit opportunities,” the source said.

One factor in isolation

One deal is not better than the other, according to this industry source.

“Each factor has to be compared in isolation; six-year has a larger risk but the multiple autocalls give you a chance to get out,” he said.

Another big difference was the underlying, with the Nasdaq-100 index being more volatile than the S&P 500.

“In general, if the index is more volatile, you should get better terms. But it’s true if you isolate the underlying as one factor. In reality, so many other factors come into play in the pricing, you can’t really tell this deal is better than the other. Because for each deal, one source of risk can be mitigated by something else,” he said.

Growth autocalls

A market participant looked at the GS Finance deal, saying that the $71 million price did not surprise him.

“This structure has become very popular. A lot of different names for it are floating around. I don’t know how to call it myself other than growth autocall. You have only one observation after one year. If you’re not called, the note becomes a growth product,” he said.

“It goes to show that autocallables have evolved. From a pure source of income, now issuers use the autocall to improve the terms at maturity and give you more upside. Those notes are not as common as the typical Phoenix autocalls. But we’re going to see more and more of them. This is just the beginning.”

The structure was also well adapted to current market conditions, he said.

Pricing, bid

“These deals wouldn’t work if rates were lower. I think we’re seeing more of those things because pricing is easier,” he said.

The call helps pricing by reducing the duration of the note. Coupon payments over long durations are expensive for the issuer, he explained.

Investors’ demand is also rising for those products.

“A lot of people don’t know what’s going to happen. Long-term, it’s OK to hold a growth note. Most people are confident that the market will be up with time. But you need the motivation for that. Most people are not necessarily interested in holding stuff longer. Comes the autocall after one year. If we get a rate cut next year, like the market seems to expect, you’ll get called with a 15% return,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes (Cusip: 40057MQN2) priced on July 25 and settled on July 28.

The fee is 3.75%.

For the TD Bank deal, BofA Securities, Inc. is the agent.

The notes (Cusip: 891162554) priced on July 28 and will settle on Thursday.

The fee is 2%.

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