GS Finance, JPMorgan ready leveraged buffered notes on MSCI EAFE for various views, timeframes

By Emma Trincal

New York, March 28 – Two issuers are readying leveraged buffered notes linked to the MSCI EAFE index for April. The main difference is the tenor and the capping, with the longer-dated note offering unlimited upside while the shorter one is capped. The leverage factor is slightly higher for the capped, shorter product, but the buffer is smaller in size and comes with leverage.

Sources compared the two products. More than just the terms, it’s their respective views on the index that determined their preference.

Five-year Goldman deal

The longer-dated product will come from GS Finance Corp. This issuer plans to price 0% leveraged buffered notes due April 30, 2024 linked to the MSCI EAFE index, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is positive, the payout at maturity will be par plus 110% to 120% of the index return. Investors will receive par if the index declines by 30% or less and will lose 1% for every 1% that the index declines beyond 30%.

Two-year JPMorgan deal

JPMorgan Chase Financial Co. LLC is readying a two-year note linked to the same index maturing on April 7, 2021, according to a separate 424B2 filing with the SEC.

The upside participation will be 150%, subject to a cap expected to fall between 15.31% and 17.97%. The exact cap will be set at pricing.

Investors will receive par if the index stays flat or falls by up to 20% and will lose 1.25% for each 1% decline in the index beyond 20%.

Going nowhere

Two years and five years are two different investments.

An ETF analyst said he is more bullish on the index over the longer term.

“I expect this economic slowdown in Europe to persist for the next few years. Do I see a dramatic reversal? Not right now because there’s just no growth at this point,” said Michael Blaszczyk, vice president of equity/ETF sales and trading at Street One Financial.

He mentioned European markets due to the high proportion of European stocks in the MSCI EAFE index, an equity benchmark for developed markets outside of the United States and Canada. While Japan is the top country in the index with a 25% weighting, countries in Europe make for 60% of the portfolio, including non-euro zone members such as the United Kingdom, Switzerland, Denmark and Sweden.

“European markets will slowly rise again, but it’s going to take years. I don’t see any driver in the short term. There’s too much uncertainty,” said Blaszczyk.

Between the two-year and five-year timeframes, his preference goes to the latter.

“I would think the longer-dated period would be safer,” he said.

“I just don’t see a quick recovery in a year or two.

“And a 30% buffer is not bad.”

Helpful buffer

Matt Medeiros, president and chief executive of the Institute for Wealth Management, agreed based on his own outlook.

“The difference between the two products depends on your conviction about the underlier. It’s what should determine the terms that you want,” he said.

“From our perspective, I like the EAFE over the long haul. I would be more concerned about the shorter-dated note and more inclined to look at the five-year.

“The five-year note fits more our macroeconomic outlook, and I think the terms, given that underlier, are more appealing.”

He pointed to the 30% buffer, which he said is “needed, especially for this asset class,” as well as the uncapped upside.

A bull play

Steve Doucette, financial advisor at Proctor Financial, looked at the terms and said the five-year note is simply more bullish.

“You have less leverage, but it might not be a bad thing. Leverage can play both ways. If you go out five years and the market is up for the first three years, you’re levered up. The market turns: you’re levered down,” he said.

He was referring to potential discrepancies between the underlying asset price and the value of the notes, which may increase over time when there is leverage.

“On the other hand, you’re not capped, which makes it more of a bull play.”

Short, in a range

The shorter-dated note would be a better fit for a sideways market, he noted.

“You just have to honestly believe that this market is not going to run much higher. It’s going to trade range-bound. The cap should not bother you in that case. Since you have leverage plus buffer, you can outperform in both directions,” he said.

“If the market is up, you’re going to outperform by 10% to 20%. Who’s going to complain about that?”

Still a buffer

Doucette said he was not concerned about the downside gearing on the two-year product even if, in theory, such feature can lead to a full loss of principal.

“I don’t have a problem with geared buffers. It would take such a drop to make you lose a significant amount of money. You’re still ahead.”

J.P. Morgan Securities LLC is the agent for the JPMorgan deal, and JPMorgan Chase & Co. is the guarantor. The notes (Cusip: 48130UQT5) will price on April 3.

Goldman Sachs & Co. LLC is the underwriter for the GS Finance offering. The notes (Cusip: 40056F5R2) will price April 25 and will be guaranteed by Goldman Sachs Group, Inc.

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