GS Finance’s $2.75 million autocall buffered notes on S&P offer fair risk-reward, advisers say

By Emma Trincal

New York, Dec. 4 – GS Finance Corp.’s $2.75 million of 0% autocallable buffered index-linked notes due Dec. 7, 2026 linked to the S&P 500 index provide investors with a good risk-adjusted return, according to buysiders.

The notes will be automatically called at par plus 11% if the index closes at or above its initial level on Dec. 2, 2024, 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 125% of the index gain.

Investors will receive par if the index falls by up to 25% and will lose 1% for each 1% loss beyond 25%.

Risk-reward

“I like the risk-return,” said Scott Cramer, president of Cramer & Rauchegger.

“The main risk, and I don’t really call that a risk, is if one year from now the market is up 20% and you get 11%.”

Should the notes fail to get called, the downside protection at maturity was attractive too, he said.

“25% is a generous buffer. If there’s a major meltdown, it would not protect you entirely, but it would still give you a fairly good level of protection.

“They probably were able to price that level of protection because the puts are cheap,” he said.

Some investors would rather see the notes mature than be called. But Cramer was open to all positive scenarios.

“I wouldn’t mind the 11% premium,” he said.

“Anything can happen,” he added, noting that the call scenario is one that at least eliminated call risk exposure.

“I like the reward too. If the market is flat or slightly up you get this booster built in it. And 11% is a great return in any market.”

The combination of an 11% call premium shifting at maturity to uncapped leveraged exposure on the upside and a 25% buffered protection on the downside were overall attractive terms.

“The risk-reward is definitely there.

“I like it,” he said.

Three-, five-year versions

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, said he was familiar with those products, which are named “catapults” in the industry.

“It’s not bad, especially for a three-year. I would love the 11% premium to be a bit higher. The leverage could also come a little bit higher,” he said.

“GS is one of the biggest sellers of those catapults. They always seem to have a few out there.”

GS Finance, however, tends to offer those products in longer durations, usually as five-year notes instead of three, he added.

“This one gives you two years to recover rather than three. That shortens your recovery period,” he said.

He explained why.

“If you don’t get called, it means the market is down. On a three-year note, there are only two years left. On a five-year, assuming the call is after two years, you now have three years to recover,” he said.

Longer durations offer other advantages.

“You can usually get more leverage on a five-year,” he said adding that he bought a five-year “catapult” last month with an upside multiple of 1.6.

“But I don’t necessarily prefer the five-year,” he said.

Premium watch

“What you really want with those notes is a good enough call premium. When they started those deals a couple of years ago, the premium was phenomenal. You would get a 20% annualized with 2x uncapped upside.

“11% is more of an opportunity cost, but it’s not bad. I think you’re fairly compensated, especially with this 25% buffer over three years. It’s nice,” he said.

While most investors buying those notes are motivated by the unlimited participation scenario at maturity, advisers need to manage clients’ expectations, he said. A call premium should be high enough to reward bulls who missed the growth opportunity they were looking for.

For advisers, the allocation of this product in the portfolio is not that straightforward, he said.

“You could look at those catapults as income. Or you could look at them as growth.

“We treat them as growth products.

“We consider them as S&P ETF replacement in our equity bucket. It’s the safest place to put them,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on Nov. 27.

The Cusip number is 40057X6F7.

The fee is 0.25%.

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