GS Finance’s $11.45 million 9.47% callable notes on Russell 2000 offer allocation choice

By Emma Trincal

New York, Oct. 13 – GS Finance Corp.’s $11.45 million of 9.47% trigger callable yield notes due Jan. 10, 2024 linked to the performance of the Russell 2000 index offer features that may be used for both equity and fixed-income replacements depending on the adviser’s outlook. The fixed interest rate and solid barrier offered by the issuer may incite advisers to use the notes for income. The coupon size on the other hand along with a short tenor and unknown effective duration may encourage them to use the product as equity replacement.

Interest is payable monthly.

The notes are callable at par on any monthly coupon payment date after three months, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 unless the index finishes below its 50% downside threshold level, in which case investors will lose 1% for each 1% decline of the index from its initial level.

Issuer call

Steve Doucette, financial adviser at Proctor Financial, leaned toward fixed-income allocation.

“The protection is huge. If you breach this barrier, you’re in trouble,” he said.

“But what are the odds you would be down 50% from where we are now? Not very likely.

“You get a very decent 9.5% coupon for a fixed income allocation. The 50% barrier is not a perfect protection, but it’s close.”

The issuer call, however, may negatively affect income investors as they may lose future coupon payments. The issuer may redeem the notes after three months or every month after that.

“At least you get paid for three months. That’s 2.4% in three months. On an annualized basis, you’re still making 9.5% a year. And if they call you, you get your principal back. That’s not the end of the world. You just don’t know when, if and why they’re going to call you.

“It adds a little bit of uncertainty. But I suppose they would call it if the market was up,” he said.

Playing the rebound

A market uptrend moving the index well above the barrier level is often a factor leading issuers to exercise their right to call. A drop in interest rates may be another driver behind a call so that the issuer doesn’t have to pay above-average rates. But in both cases, the issuer is not obligated to exercise the call.

“That call is not such a bad thing. If the market is up, it frees up some cash so you can participate in the upside directly without a cap,” he said.

If on the other hand the market further declines due to a recession, interest rates may drop, he noted.

“You might make some capital gains on your bond holdings if rates go down although that won’t happen if you get called at par,” he said.

Too short

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was more inclined to use the notes for the equity portion of his portfolio.

“The coupon is great. The barrier is great. It sounds like a very interesting note,” he said.

“The return is very good in light of where we are in this market.”

Medeiros said he is not very bullish short term as a result of several market and economic challenges.

“There is the Fed challenge. There is market challenge. There is the economic challenge with growing concerns about a recession. And there are political challenges. It’s hard to see a lot of growth in the near term,” he said.

In his allocation decision, Medeiros proceeded to first eliminate the use of the notes as a fixed-income substitute.

“There are a number of reasons for that, but the number one reason is the tenor. Fifteen months is a very short time. When I look at fixed-income replacement, I’m planning for income over a much longer period of time,” he said.

The call option potentially shortening the duration to three months rendered such concern all the more relevant.

The case for equity

“It’s nice to have a higher yield for fixed-income. But you can’t run your fixed income budgeting for 90 days. I want longer term maturities when I’m planning for income,” he said.

The issue of an early redemption however was not such a disadvantage if one considered using the notes as an equity substitute, he said.

“I would take this from my equity budget.

“First, not knowing if my holding period is going to be as short as three months is not something I would worry about if I don’t use the notes for income.

“Second 9.47% is a great equity return. In fact, it’s more than I would expect, so I wouldn’t be concerned about being capped out.

“Finally, you have a solid downside protection of 50%. That’s a prudent way to allocate toward equity.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. and UBS Financial Services Inc. are the agents.

The notes (Cusip: 36264U108) settled on Tuesday.

The fee is 0%.

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