GS Finance’s $74,000 bearish autocallable absolute return notes on S&P designed for mild bears

By Emma Trincal

New York, March 29 – GS Finance Corp.’s $74,000 of 0% bearish autocallable absolute return notes due March 27, 2025 linked to the S&P 500 index provide possible gains if the index falls within a range. But the likelihood of a call makes the notes less appealing for a pure directional bearish play.

If on any day during the life of the notes the index closes at less than 70% of the initial level, the notes will be automatically called at par, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes at or above its initial level, the payout will be par plus 9.5%.

If the notes are not called and the index falls by no more than 30%, the payout will be par plus the absolute value of the index return. If the index declines by more than 30%, investors will receive par.

Safety first

“They’re not selling you a dream. But you can still make 30% if the index is down 30%. If the market is up, you get 4.25% a year only. But the reality is you have principal protection. So, to be fair, you have to compare this note to the risk-free rate,” said Samuel Rosenberg, managing partner at Lutetia Capital.

A FDIC-insured two-year deposit would probably yield between 2.5% and 3%, he said. The two-year Treasury yielding 4.1% would be slightly lower.

The notes were not designed to beat cash or the risk-free rate of return. Designed with a bearish bias, the structure allowed for possible gains of up to 30% thanks to the absolute return component. In any event, investors were removed from market risk exposure, he noted.

“This is for somebody who is conservative, somewhat bearish and who needs an alternative to risk-free returns,” he said.

“If the index is down 20%, you get a positive return of 20%. There’s an interesting hedging component to it.”

Call effect

Besides possibly earning an absolute return or a fixed payout of 9.5% at maturity, investors faced a third scenario – which was to get their principal back with 0% return should the notes get called.

“That’s if the S&P drops more than 30%. You can’t be too bearish,” he said.

The call option, if triggered, represented an “opportunity cost” to investors.

“You get no return in that scenario only. But for some investors, it’s comforting to know they will get their principal back no matter what,” he said.

The opportunity cost had to be measured against the safest sources of cash replacement.

“The opportunity cost is the risk-free rate. So, you’re missing out 3% or 4% a year,” he said.

In addition to that, investors had to factor in credit risk.

“You don’t have the FDIC insurance of a CD or the backing of the U.S. government that comes with a Treasury note. You are taking the Goldman Sachs risk. But is Goldman Sachs truly going to go under? Most people are comfortable taking that risk.

“So again, not a dream, but a relatively safe asset you can use as a hedge,” he said.

Not very beneficial

A market participant said the deal was probably a one-off.

“This looks like a customized note. It’s got such an unusual payoff. I don’t see this having mass appeal. It’s probably for one client trying to express a view,” he said.

But he was not impressed by the various possible outcomes.

“In most scenarios, you don’t win.

“If the notes are called, you get nothing.

“If the index finishes up, you get something that’s probably not very much higher than what you would have in a money market fund or a T bill.

“You’re taking Goldman’s credit risk.

“In all scenarios, there is no material upside that’s favorable to investors except in the 70% to 100% range,” he said.

But that was assuming investors would not get called, he said.

“The call can be triggered so easily. It’s an American style knock-out.”

He was referring to the fact that the call observation dates were set “any day” instead of the usual monthly, quarterly, or semiannual determination date.

“It’s not bad for Goldman if the notes are called. It’s bad for the client,” he added.

“You have to be bearish but not too bearish.

“The only way you can make money is in the absolute return range. But you have no kicker. If you get close to minus 30%, you’ll probably get knocked out.

“It looks like an over-structured product. It’s like a Frankenstein to me.”

The notes will be guaranteed by Goldman Sachs Group, Inc.

The underwriter is Goldman Sachs & Co. LLC.

The notes settled on Tuesday.

The Cusip number is 40057PZX3.

The fee is 1.5%.

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