GS Finance shows two uncapped leveraged notes offerings, catching advisers’ attention

By Emma Trincal

New York, June 15 – GS Finance Corp. recently priced two different uncapped leveraged notes, a structure that is still very much in favor but not in great supply.

The first deal was longer in maturity and tied to the worst of two underliers, but as a reward, it came with a solid barrier. The second was much shorter and tied to a single index but lacked any downside protection.

Two deals

GS Finance priced $650,000 of 0% underlier-linked notes due June 12, 2026, linked to the least performing of the iShares MSCI EAFE exchange-traded fund and the Euro Stoxx 50 index, according to a 424B2 filing with the Securities and Exchange Commission.

If each underlier finishes at or above its initial level, the payout will be par plus 2.29 times the return of the least-performing underlier.

If the laggard underlier falls by up to 35%, the payout will be par. Investors will be fully exposed to the decline of the least performer if it falls by more than 35%.

Separately, GS Finance was expected to price 0% gears due June 19, 2023 linked to the Euro Stoxx 50 index, according to a 424B2 filing with the SEC.

If the index return is greater than zero, the payout at maturity will be par of $10 plus 1.85 to 1.95 times the index return. The exact leverage factor will be set at pricing.

Investors will be exposed to any index decline.

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, said he favored the second offering (shorter-dated notes) despite the absence of any downside protection.

“I certainly prefer a shorter term and I certainly prefer one, which is not a worst-of,” he said.

“The 1.9 and 2.29 leverage factors are pretty close,” he added.

Leverage, laggard

He used a hypothetical midpoint for the 1.85 to 1.95 leverage range disclosed on the prospectus for the second deal, which priced on Monday. Pricing information was not yet filed on the SEC website at press time.

“In both cases, the leverage allows you to offset what you’re losing in dividends.”

Foldes also liked the Euro Stoxx 50 index, which is common in both deals although not exclusive in the first deal.

“The European market has trailed the domestic market. This is probably a good time to get two-times the return of the Euro Stoxx,” he said.

The leveraged exposure with no cap on the upside was attractive in both offerings.

“I like both notes. We always like to see unlimited upside. But I much prefer the shorter one,” he said.

Too much protection

Regarding the longer-dated note, Foldes criticized the size of the barrier.

“Five years out, you don’t need a 65% barrier on major stock indices. It would be highly unusual for a five-year note to be down. I wouldn’t want to be paying for this barrier, which would be unnecessary. If anything, I would want more money toward the upside, which means substantially more leverage in this case since there is no cap.”

The single-asset exposure versus the worst-of made the two-year more compelling as well.

But the main reason behind his preference was the shorter duration.

“There is no question that we prefer short-term notes. You don’t want to have your money tied up for an extended period of time. By virtue of having a shorter tenor, you have greater flexibility of moving out within a reasonable amount of time.

“I really like that two-year note. If you have any amount of bullishness this is probably the best way to play it,” he said.

Defense first

Another financial adviser liked both notes, with a slight preference for the longer-dated product.

“They’re different enough that you can look at it differently,” this adviser said.

“The uncapped upside with leverage, those are huge things we always look for. Over the past two or three years, the uncapped ones were the way to go.”

Perhaps the five year was more in line with this adviser’s style of investing.

“The five-year is more defensive. First, this one has a barrier. But even in general, longer-dated notes tend to be more defensive,” he said.

“You’re almost certainly going to have a pullback over a longer time period, but you can come back out of it.

“Over a two-year period, you can really get hurt.

“That’s why we tend to prefer longer-dated notes from a strategic point of view.”

Paying for the barrier

The difference in leverage between the 2.29 leverage factor on the five-year product and the 1.9 hypothetical multiple on the two-year note was not significant, he noted.

“I would have expected more on the five-year. But you’re getting the 65% barrier. That’s what you’re paying for. The concession is the longer tenor,” he said.

“In both cases, you’re losing income, but the leverage is enough for you to break even. You’re giving up a little bit more in dividends with the five-year one.”

Deal breaker

The two offerings looked good at first glance. But this adviser concluded he would pass up both.

“My problem is the Euro Stoxx 50. I really don’t like this index. And you have it in both deals,” he said.

“It’s 50 stocks. That’s pretty concentrated.”

The weightings of the top five holdings represent more than 25% of the index, he noted.

“Its performance is terrible. Over the past 15 years, the Euro Stoxx 50 performance is one of the worst compared to other major indexes. It’s a dog.”

He attributed the underperformance of the euro zone benchmark to technology.

“European companies do not really compete with our big tech giants,” he said.

This adviser added that the benchmark was “significantly” volatile.

“It’s not a good index. I could go with the EAFE or even the MSCI Emerging Markets index. But to me, the Euro Stoxx is a deal killer,” he said.

Goldman Sachs Group, Inc. is the guarantor of both issues.

Goldman Sachs & Co. LLC is the underwriter on both deals.

UBS Financial Services Inc. is the selling agent on the two-year notes offering.

The five-year notes (Cusip: 40057HK74) priced on June 9 and settled on June 14.

The fee is 0.5%.

The two-year notes were expected to settle on Thursday.

The Cusip number is 36260Y591.

The fee is 0%.

© 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.