Citigroup’s barrier securities on Dow, Nasdaq, S&P offer value amid tech pullback

By Emma Trincal

New York, Sept. 8 – Citigroup Global Markets Holdings Inc.’s 0% barrier securities due Sept. 12, 2025 linked to the worst performing of the Dow Jones industrial average, the Nasdaq-100 index and the S&P 500 index offer an attractive leveraged and uncapped upside at good entry levels, buysiders said, as selling pressure in large-cap and tech stocks went on for the third session in a row on Tuesday.

The payout at maturity will be par plus 175% of the worst performing index if all three underliers finish above their initial levels, according to a 424B2 filing with the Securities and Exchange Commission.

If the worst performer declines, but not more than 30%, the payout at maturity will be par.

Otherwise, investors will be fully exposed to the decline of the worst performing index.

Buying at the dip

“The indices, especially the Nasdaq, shed a lot last week and this week, which is good,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“Buying right is very important to us. Before last week’s sell-off, Monday, Tuesday and Wednesday, we were actually selling things.”

Kalscheur says timing is important even if his strategy is designed for long-term investors.

“We don’t day trade, but we are cognizant of price. We don’t want to invest when prices are super high,” he said.

The Nasdaq continued to fall further on Tuesday after the Labor Day weekend, down 4.77% on the day and off 11% from its Sept. 2 all-time high after three consecutive negative sessions.

Issuer, tenor

Kalscheur said the terms of the notes fit his requirements in terms of structure.

“This is exactly the kind of notes that we buy for our clients,” he said.

“Citi is a strong name. It’s the fourth or fifth largest holding of notes in our portfolio. We have several issuers because we like to spread the credit risk around.”

But long maturities are just as important for this buysider, who explained that he is happy to take on some liquidity risk in exchange for enhanced terms.

“Five-years is our bread and butter,” he said.

“The 1.75 leverage is just incredible. Now it’s a worst-of. But we have found that worst-of are the deals where you’re getting the best terms.

“So, we’d have no qualms about taking the worst of the Dow, the Nasdaq and the S&P.”

Leverage

The leverage factor was high enough to counteract the non-payment of dividends, he added.

“If the market is up 10%, you get 17.5%. That more than offsets the loss of dividend yield,” he said.

The S&P 500 index yields 1.65%; the Dow Jones industrial average, 2.10%; and the Nasdaq, 0.55%.

“Depending on the index, that could be a big chunk of change you have to make up for. But this note will compensate you,” he said.

The leverage especially without a cap is designed for higher returns.

“In a market that goes up only 8% a year, you would get 14%. That’s definitely good both for sideways and bull markets,” he said.

Barrier, fee

Even the downside was attractive over the five-year timeframe, he noted, using back-testing analysis his firm has collected on the S&P 500 index.

“The downside protection is fantastic. On a 60-month basis, 99.80% of the time you’re not going to break that barrier. That’s a 0.2% chance of losing money. This is based on five-year rolling periods over a 70-year timeframe.

“I would feel pretty comfortable showing this to a client,” he said.

Finally, Kalscheur was impressed by the 0.75% fee disclosed in the prospectus.

“That’s 15 basis points a year. You can’t even get a managed ETF for that, he said.

“The pricing is extremely competitive.

“This is exactly the kind of notes and risk-return we would be looking for.

“We will obviously be reviewing this offering.”

Correlations

A financial adviser noted that most of the risk lies in the worst-of, especially with three indexes. But the risk declines when correlations increase between the underliers.

“You get that additional risk if one is not correlated to the other,” this adviser said.

“We know the S&P and the Dow are highly correlated. But there’s also a strong correlation between the S&P and the Nasdaq because both indices have large market capitalization and the S&P is pretty tech-heavy itself.”

The coefficient of correlation between the Dow and the S&P 500 index is 0.99. The correlation between the S&P 500 and the Nasdaq is 0.94. The lowest correlation is between the Dow and the Nasdaq at 0.90.

“Getting 1.75 times with no cap is definitely attractive,” he said.

“On a five-year, the 70% barrier is solid.

“I like that trade.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will price on Wednesday and settle on Sept. 14.

The Cusip number is 17328WHY7.

© 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.