Citigroup to sell inflation-linked notes offering unusual hybrid of features, adviser says

By Kenneth Lim

Boston, July 29 - Citigroup Funding Inc.'s planned inflation-linked notes deal is an unusual leveraged play on the Consumer Price Index, an investment adviser said.

Citigroup plans to price 1.5% principal protected notes due 2014 linked to the CPI.

The notes will pay a fixed coupon of 1.5% each month, beginning in September 2009.

The payout at maturity will be par plus 150% to 175% of any gain in the CPI, with the exact participation rate to be set at pricing.

Investors will receive at least par.

Uncommon structure

The product is unusual in a number of ways, the adviser noted. Like Treasury Inflation-Protected Securities, the notes pay a fixed coupon, and the rate of inflation is reflected in the principal.

"Most of the structured notes I've seen that are linked to the CPI are floating rate, meaning the principal stays the same but the coupon you get varies with the CPI," the adviser said.

But while TIPS reflect changes in the CPI at each interest payment, the Citigroup notes will reflect the changes only at maturity.

"It's kind of like a zero-coupon structure mixed with an income structure," the adviser said.

Calculating the inflation at the end of the product's life could be slightly negative for investors, the adviser said.

"You lose a bit of reinvestment opportunity," the adviser said. "It's a five-year product, so that reinvestment potential can be quite significant."

Inflation and more

But the product offers something that TIPS do not - leverage on changes in the CPI.

"That's kind of an interesting feature to have," the adviser said. "That means my outperformance scales up with inflation. You do better the higher the inflation rate. And there's no upper limit on the returns and 100% principal protection on the downside, which can be quite attractive."

The product will be useful for cautious investors who expect inflation to be above a certain percentage over the next five years, the adviser said. That percentage will depend on what investors can get in similar-risk products.

"If I can get 4% on a five-year CD, then I would expect that inflation should be at least 2.5% so that my return at least matches what I get on a CD," the adviser said.

© 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.