GS Finance’s $5.45 million autocall notes on Nasdaq require ‘having a view,’ adviser says

By Emma Trincal

New York, July 20 – GS Finance Corp.’s $5.45 million of 0% autocallable buffered index-linked notes due July 21, 2025 linked to the Nasdaq-100 index offer different scenarios for investors seeking either growth or yield enhancement. But choosing how to use the somewhat complex structure was not easy, advisers said, although fixed-income replacement was probably the most logical use of the notes, they noted.

The notes will be automatically called at par plus a 10.2% annualized premium if the index closes at or above the initial index level on any quarterly call observation date after six months, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index return is positive, the payout at maturity will be par plus 150% of the index gain.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% loss beyond 10%.

Strange catapult

“It’s kind of strange. With the Nasdaq, you’re going to get called. Forget about the unlimited upside at maturity. Chances are you’ll be capped at 10%,” said Steve Doucette, financial adviser at Proctor Financial.

Most of the notes combining callable features with uncapped leveraged return at maturity limit the number of autocall observations to one only, generally at the end of the first year, he noted. The industry has coined the term “catapult” to designate those hybrid structures.

“That way you still have a chance to get the uncapped leverage at the end. But with this one, it looks like you’re going to get called. You have six calls and a very volatile index. Chances are this leverage scenario is not going to happen,” he said.

Make it simple

Doucette said he was unsure why an investor would choose the note.

“I guess the only reason you would get into that is for fixed-income replacement. But then why make it such a complicated note? The odds that you’re going to get called are pretty high. So why not getting rid of that leverage at maturity?”

In doing so, the issuer may be able to raise the premium and/or strengthen the downside protection.

“If you look at recent worst-of autocall on indices, it’s not impossible to find a 60% barrier. Then you have to find out what type of coupon you can get,” he said.

Nasdaq

Doucette typically avoids using the Nasdaq-100 index in an income note.

“Do I want to do a deal on Nasdaq? No. It’s still going through the roof. I don’t want to cap myself at 10%. And if it drops, it drops a lot. Is the 10% buffer going to give me enough downside protection? I don’t think so.

“To me this underlying doesn’t make sense unless you use it for growth.

“But how likely am I going to have any growth at maturity if the index is negative six quarters in a row?” he said.

Indeed, for the notes to mature, the Nasdaq would have to be below its initial level on each call date, including the last one, he explained.

“What kind of growth am I going to get in the last three months?

“I guess you have to hope to be called and you probably will. This note only makes sense if it’s used for yield replacement,” Doucette said.

Bond substitute

For Matt Medeiros, president and chief executive of the Institute for Wealth Management, the note would most certainly fit into the fixed-income allocation of a portfolio.

“If I’m looking at this from a yield perspective, it’s an interesting note because I’m getting a little more than most similar structures,” he said.

“But I would prefer semi-annual as opposed to quarterly call observations. It would make my allocation to my fixed-income bucket a little bit easier.”

Having a view

“In a potentially low return environment, having the return enhancement is very nice especially without a cap.”

But the structure could have been improved on the downside.

“The buffer is not that big. I would prefer a larger one,” he said.

However, the buffer will not be used if the notes are called prior to maturity.

“I think it’s very likely that they will,” he said.

The structure offered several possibilities and a good call premium. But investors had to be sure why they would buy the notes.

“You have to have a view when you look at this investment. Are you buying it for the upside return or for the yield?

“I like it for my fixed-income bucket. But again, I would want to see less frequent call dates and a more substantial downside protection,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on Monday.

The Cusip number is 40057TF90.

The fee is 0.8%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.