GS Finance’s buffered digital notes linked to Euro Stoxx 50 offer fair risk-adjusted return

By Emma Trincal

New York, June 25 – GS Finance Corp.’s 0% buffered digital notes due in 60 to 63 months tied to the Euro Stoxx 50 index give investors a fair trade-off, according to a financial investor.

If the final index level is greater than or equal to the initial index level, the payout at maturity will be par plus the greater of the digital return, which is expected to be 51.39% to 60.29%, and the index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is greater than or equal to 70% of the initial index level but is less than the initial index level, the payout will be par.

If the index declines by more than 30%, investors will lose 1.4286% for every 1% that the final index level has declined beyond 30%.

Digital return

“It sounds like a pretty good compromise,” said Jonathan Tiemann, president of Tiemann Investment Advisors, LLC.

“For the lack of liquidity and credit risk you’re taking, you get some help on both sides.”

He pointed to the “boost” on the upside, the guaranteed digital payment, and a “decent size” buffer on the downside.

The longest maturity of 63 months and the lowest minimum return of 51.4% would provide the worst set of terms based on the ranges disclosed in the filing. Under such scenario, the digital return would then be 8.2% a year on a compounded basis.

Conversely, if the issuer picked the shortest duration (60 months) and highest digital payout (60.29%), the annualized compounded return would then be 9.9%.

“It’s pretty generous knowing that it’s just a minimum return. Above that, you’re long the index and you don’t have a cap.”

Buffer

The downside was also fairly attractive, starting with the buffer amount.

“On the downside, if you’re not hugely negative, you get your capital back,” he said.

“If the index is off by even 40%, you’d have a modest loss of 14.3%.”

Even the geared buffer was “not a problem” in his view.

“In theory you could be wiped out, but the index itself would have to go down to zero for you to lose everything.

“You’re still not worse off than if you were long the index fund.”

Trade-off

In exchange for those terms, investors have to hold the notes for five years. They also must forgo the high-paying yield of the underlying index, which is about 2.85%.

“You’re sacrificing something, but you’re pretty well compensated for it. I’m not always a fan of those products. But this one is fair. It’s actually quite good,” he said.

The structure may be attractive, but not all financial advisers are bullish on Europe, especially the euro zone.

Europe? No thanks

“We’re allocating most of our assets in the U.S. We’re not interested in Europe. Europe can stay cheap forever,” a financial adviser said.

“They have negative interest rates. They have 0.5% to 1% GDP. They’re not fiscally responsible. They’re going to have to do something. We could see a split one day with Southern Europe exiting the union. If not, the union itself could implode. There are too many imbalances between countries like Germany and Italy.

“I wouldn’t want to invest in the euro zone. The political, fiscal risks are way too high.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The Cusip number is 40056FQ40.

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