Citigroup’s $3.59 million of geared autocall buffer notes on Nasdaq-100 to generate yield, alpha

By Emma Trincal

New York, May 25 – Citigroup Global Markets Holdings Inc. priced $3.59 million of 0% geared autocallable buffer securities due May 23, 2023 linked to the Nasdaq-100 index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus 8% if the index closes at or above its initial level on May 25, 2022.

The payout at maturity will be par plus 1.3 times any index gain.

Investors will receive par if the index falls by up to 15% and will lose 1.1765% for every 1% that the index declines beyond 15%.

Year one

“Although this note is a little complex for the retail crowd, as long as we don’t have a big crash, it’s reasonable,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

If the notes are not called, the 8% premium after one year becomes a cap, he noted.

“I’m not a fan of the cap. But at the same time, tech has been overextended and value stocks have been doing really well. So, we’ll probably see a flat year for the Nasdaq, in which case, 8% is pretty decent.

“I feel comfortable on year one.”

Inflation, bull longevity

The scenario at maturity requires a different analysis and involves more risk.

“Year two is anybody’s guess,” he said.

A pullback in the technology sector is a possibility due to the high valuation of the Nasdaq, he said.

At the same time, what has pushed down the price of the benchmark lately – namely inflation fears – is not such a concern for this adviser.

“I think inflation is going to be transient this year. I think it has to do with supply chain disruptions and pent-up demand after the pandemic. I don’t see it as a long-term trend.”

As a result, Chisholm does not expect inflation to pose a durable and serious threat to the performance of big-tech stocks, whose valuations are more sensitive to rising prices than others.

What may have more of an impact short-term are the “higher taxes coming out,” he said.

“Also, the fact that the current bull market is the longest one in history raises concerns.

“If the bull ends, it’s hard to predict where the Nasdaq is going to be in two years,” he said.

“But having a buffer rather than a barrier is nice.

“The leverage with no cap is nice too.

“I do like the note. I don’t like many. But I do like this one.”

Potential for alpha

Jonathan Tiemann, president of Tiemann Investment Advisors, said the note allowed investors to outperform the benchmark in most situations.

“You may not outperform if the Nasdaq is up more than 8% a year from now. But short of that, you’re set to beat the index at maturity either way,” he said.

“If the index is down 50%, you’ll lose 41% with the buffer, which is not as much as losing 50%.

“On the upside, you’ll be better off than the index since you have the leverage and no cap.”

The non-payment of dividends was not a real issue, he said, first, because the leverage will offset its impact and second because the 0.52% dividend yield wis modest and the note, shorter dated.

One-year recovery

“It’s interesting. They’re giving you an unusual form of selling the upside for protection,” he said.

The long-term averages made the call at the end of the first year the most likely outcome, he added.

“If somebody has a view that the market is elevated right now and may be flat a year from now, it’s probably the right call. If you’re wrong, you still have the exposure with a chance to outperform in both directions.”

The one-year window between the call date and the maturity date was sufficient to make the trade profitable, in his view.

“You have one year for a rebound. One year is enough time to recover as we saw last year,” he said.

Between its bottom in May 27, 2020 and May 25, 2021, the Nasdaq-100 has gained nearly 50% in just about a year.

“We came way back,” he said.

Comfort level

Tiemann is not always in favor of structured products, objecting to the limited liquidity, credit risk exposure and non-payment of dividends. But in this case, those drawbacks were minimized.

“I like this note more than most,” he said.

“It’s not too bad on the liquidity front. It’s a two-year and you have a call in the middle of the term.

“With Citi as the issuer, you’re not going to worry much about credit. It seems like a reasonable risk.

“Of course, you’re giving up the dividends, but it’s embedded in the pricing.

“I imagine it was tailored for a client. Not a bad note at all,” he said.

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Friday.

The Cusip number is 17329FCU6.

The fee is 0.25%.

© 2015 Prospect News.
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