GS Finance’s autocalls on S&P 500 offer the full-protection variant of trendy structure

By Emma Trincal

New York, Oct. 19 – GS Finance Corp.’s 0% autocallable index-linked notes due Nov. 1, 2027 linked to the S&P 500 index is the conservative version of a popular structure, which in general combines a one-time call with uncapped participation at maturity, sources said.

The notes will be automatically called at par plus a 26.2% call premium if the index closes at or above its initial level on Oct. 25, 2024, according to a 424B2 with the Securities and Exchange Commission.

If the final index level is greater than the initial index level, the payout at maturity will be par plus the index gain.

If the index finishes flat or declines, investors will receive par.

The typical version of this uncapped structure usually does not come with full principal-protection.

Typically, the product emphasizes the upside with leverage, offers a shorter maturity (two to three years) and the call occurs at the end of the first year. The downside comes with a barrier or buffer.

Call versus cap

“This five-year note is designed for principal protection,” said a structurer.

“Why five-year? You need at least that to provide the 100% protection,” he said.

The introduction of an automatic call observed only once was also necessary to combine full protection and uncapped upside, he said.

“You could do the principal protection on a five year without a call. But then you’d have to throw a cap in there, perhaps in the 50% to 60% range,” he said.

“This structure is popular because I don’t think people see the call feature as limiting. They see it as a positive. It’s probably better accepted than a cap at maturity especially over a longer period.”

One-year, two-year calls

With the five-year tenor, this issuer was able to push the call date one year later than the usual period of one-year after issuance.

“The two-year autocall helps boost the premium a little. If you compare two similar notes with full principal protection, the one-year call is going to be lower on an annualized basis,” he said.

Principal protected notes using the one-time call have to be longer, he added.

“You can get a two-year term with a higher premium. You still have the uncapped, but you won’t get the principal protection,” he said.

A market participant said that issuers a few years ago launched the structure with shorter-dated maturities and a call after one year, but the product evolved since then. He agreed that the autocall after two years provides a higher call premium on an annualized basis.

“The same deal with a one-year autocall would probably price at 10% a year, 11% if you push it. Here your annualized is 13%,” he said.

A call in three years would give an even higher premium on an annualized basis, he noted.

“I like this structure for the principal protection. We’ve done a few already. I think we’ll be looking into doing some more,” he said.

One is not enough

A financial adviser did not share that view.

“I don’t like it very much. I would rather do an autocall with memory interest. Here, you only get one chance to be called. If you don’t, you’re stuck for five years, and you will underperform the index on the upside since it’s just one-to-one without the dividends,” he said.

This adviser also said that maximizing the downside protection over a five-year term was not necessary.

“You’re sacrificing too much upside and you’re unlikely to need the protection over that period of time based on historical returns. I don’t have a problem with the five-year. But I’d like to see several calls, a higher premium and a barrier at maturity,” he said.

The securities are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes are expected to price on Oct. 25 and to settle on Oct. 28.

The Cusip number is 40057NPH4.

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