Sellsiders consider leverage versus buffer in two GS Finance autocalls with unlimited upside

By Emma Trincal

New York, Jan. 11 – One of last week’s top deals was GS Finance Corp.’s $60 million of 0% autocallable index-linked notes due Jan. 8, 2027 tied to the Nasdaq-100 index. The product was built on a popular structure consisting of a one-time autocall coupled with unlimited upside at maturity if the call failed to occur.

The notes (Cusip: 40057PF49) will be called at par plus a 17% call premium if the index closes at or above its initial level on Jan. 8, 2024.

If the notes are not called and the index finishes positive, the payout at maturity will be par plus 1.25 times the index gain.

Otherwise, investors will be fully exposed to any index decline.

Goldman Sachs & Co. LLC was the agent. The deal priced on Jan. 5.

Decent premium

“It’s a way for people to get out early. It pays a decent premium. If you get 17% after one year, I imagine you’re not going to be unhappy,” a market participant said.

If the call never materializes because the Nasdaq-100 index is negative at the end of the first year, investors still have a chance to outperform the market, he noted.

“You get the leverage on the upside, and you still have three years left. How much worse can the Nasdaq be?”

“I think there’s potential for upside during the remaining three-year time span. If it doesn’t get called, I suppose it will trade pretty well on the secondary market. I can’t imagine it would trade at a big discount to the underlying.”

Equity replacement

Brady Beals, director, sales and product origination at Luma Financial Technologies, noted the absence of any barrier or buffer. But the missing piece is consistent with what the product was supposed to do, he said.

“Having no downside protection doesn’t really bother me here,” he said.

“Look at it that way: the pricing of structured notes is based on three factors: potential return, principal-at-risk and the holding period.

“Whenever you buy a structured note, you typically hold it to maturity as opposed to a stock, which you can sell any time. There’s a tradeoff for sacrificing the liquidity. Potentially you can get a better return and a better chance to recoup your principal.

“If you’re going to be invested in the Nasdaq for four years through this note, if you’re going to take the same amount of risk as if you were buying the index outright, why wouldn’t you want a better return? You have the same risk exposure. You’re just holding the notes for a long period of time. To me the leverage is consistent with what the structure is designed to do. If you’re bullish, you can use it as equity replacement in your portfolio,” he said.

Another one next week

For less bullish investors, GS Finance announced a similar deal with a five-year maturity due to price next week. The same structure is applied – one-time autocall, unlimited upside – with a call date pushed one year further.

But the issuer changed the risk profile by eliminating the upside leverage substituting it for a 50% buffer on the downside. The call premium triggered at a 100% threshold will be between 19% and 21%. At maturity, investors get the index gain.

“This second version shows the flexibility of structured notes,” said Beals.

“If return enhancement is not your main objective, you can focus on the downside protection. In this case, a 50% buffer will certainly do the job,” he said.

Two deals

The market participant said it was good to have options.

“I like this second one better. I don’t know that I would look at a note without any downside protection. Most of the buyers that we have especially in this market definitely want the protection,” he said.

At the same time, the $60 million leveraged note offered significant advantages to a more aggressive type of investor.

“It’s a big size,” he said.

“It’s definitely a good structure for a buyer who thinks the sell-off in the Nasdaq has been made. It’s much more bullish. For those buyers, the risk would be to be called at 17%. Take the case of the Nasdaq rising 25% in one year. Getting called out may not be such a good thing for people who want as much upside as they can get.”

This market participant said that comparing the two offerings was interesting.

“You’re looking at two different types of products. Buying one versus the other is a function of the type of buyer. But it’s also a function of the underlying that you pick. The Nasdaq was down 33% last year. A lot more correction occurred in the Nasdaq than in the S&P,” he said.

The S&P 500 index declined by 19.4% last year.

“In that context, the notes tied to the Nasdaq, which offer leverage but no protection, sort of make sense not just based on the buyer’s risk profile but also on the underlying itself,” he said.

Goldman Sachs & Co. LLC and UBS Financial Services Inc. are the selling agents for the upcoming offering.

The deal is expected to price on Jan. 13 and to settle on Jan. 19.

The Cusip number is 36264U686.

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