Goldman’s 10-year trigger phoenix autocallables linked to indexes offer high-yield replacement

By Emma Trincal

New York, March 16 – GS Finance Corp.’s trigger phoenix autocallable optimization securities due March 31, 2026 linked to the worse performing of the Russell 2000 index and the S&P 500 index may be used to generate a high yield with some downside protection and as a substitute for a bond portfolio’s high-yield allocation, said a financial adviser.

The notes will pay a contingent quarterly coupon at an annualized rate of 7.05% to 8.05% if each index closes at or above the coupon barrier level – 70% of the initial level – on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if each index closes at or above its initial level on any quarterly observation date after one year.

The payout at maturity will be par plus the contingent coupon unless either index closes below the 50% trigger level, in which case investors will be fully exposed to the losses of the worse-performing index.

Yield play

“This is for a client looking for yield replacement. Most bond funds have low-single-digits returns,” said Tom Balcom, founder of 1650 Wealth Management.

“Clients are looking for yield, and they are worried about the high-yield sell-off. This may address that issue: you’re getting some high yield with protection.”

The iShares iBoxx $ High Yield Corporate Bond fund offers a 6.05% yield.

“In comparison, you could pick up an extra 200 basis points. There is risk in the junk bond market, as we know. I can see this note as a high-yield bond substitute. Both are correlated to equities. The notes give you a 50% downside protection without the risky credit exposure.”

Tenor

He did not see the 10-year duration as a drawback.

“There is very little chance that this will be held for 10 years. It’s going to be called away. Sure, it’s a worst of and you need both the S&P and the Russell to close above their initial price, but these two over time are highly correlated with one another.”

A market participant agreed.

“The long duration doesn’t surprise me at all,” he said.

“We used to see worst of three stocks. Three stocks can give you a shorter term. But here, we’re talking about two broad-based indices, two U.S. benchmarks.

“The S&P and the Russell are highly correlated. They’re almost the same from a statistical perspective. It’s almost as if you were doing it on the S&P.”

Trade-off

The worst-of notes could have been structured on a shorter timeframe, but investors would have had to sacrifice something – be it a lower contingent coupon, a higher barrier at maturity or a negative correlation between the reference assets, he explained.

“This is an income deal. People are focus on one thing: yield. They want a 7% or an 8% in a market that may not give them all that much.

“The barrier is attractive. The coupon is competitive. The risk is reduced with the correlation.

“Something has to give, and that’s why you get a 10-year [term].”

Goldman Sachs & Co. is the agent.

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

The notes will price on March 29 and settle on March 31.

The Cusip number is 36250E563.

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