Citigroup’s autocallables on Russell, S&P to outperform in moderately bullish market

New York, July 30 – Citigroup Global Markets Holdings Inc.’s 0% autocallable securities due Aug. 25, 2025 linked to the worst performing of the Russell 2000 index and the S&P 500 index may appeal to investors who anticipate muted returns in the next few years as U.S. stocks keep on making new highs.

If each index closes at or above its initial level on any annual valuation date, the notes will be called at par plus an annualized call premium of 9.25%, according to a 424B2 filing with the Securities and Exchange Commission.

If each index finishes at or above its initial level, the payout at maturity will be par plus 37%, the premium applicable to the final valuation date.

If the least performing index falls but not below the trigger level, 70% of the initial level, the payout will be par.

Likely call

Jeff Pietsch, founder of Eastsound Capital Advisors, said the return of the notes was attractive.

“Based on current market valuations, I don’t expect stellar performance in stocks for an intermediate timeframe,” he said.

Each year, investors have a chance to pocket the premium when the reference index is not negative. For Pietsch, such objective was achievable.

“The odds of having four down years in a row are low,” he said.

“The odds of getting 9.25% per year given the catch-up seem pretty good.”

He was referring to the memory feature of the notes allowing investors to capture missed payouts later, hence to “catch up” with previously unpaid premium.

For instance, if the call is triggered on the second yearly observation rather than on the first one, investors will receive 18.5% when the notes are called on the second determination date.

“You have four years, or four chances to get called. It’s likely that during that time frame, the call will be triggered at some point,” he said.

Worst-of, dividends

Pietsch said the 70% barrier after four years was reasonable.

In addition, the risk associated with the worst-of was not high, he added, pointing to the correlation between the two underlying indexes.

The S&P 500 index and the Russell 2000 index have a 0.89 coefficient of correlation on a scale of zero to 1, which indicates that both underliers are likely to move in synch.

“I’m not too worried about the worst-of,” he said.

One problem with longer-dated notes in general is the compounded “loss” associated with the non-payment of dividends over time. But Pietsch downplayed this issue.

“You’re giving up dividend yields, but real dividend yields are actually negative because of current interest rates. So, I don’t think the opportunity cost on the dividends is a big negative,” he said.

Expected returns

When running several market scenarios, using best, moderate and worst cases over the four-year period, Pietsch said he expects the U.S. market to yield low single digit returns.

“The opportunity to get a high single-digit return with limited downside risk looks appealing to me,” he said.

Another “appealing” factor was the cost of the product with fees totaling 0.80%, according to the prospectus.

“The 80-basis points fee is not bad. That’s 40-bps per year. We look for 20 to 30 bps per annum, so it’s close,” he said.

“It’s not a bad note,” he said.

“If I used it, it would be as part of my structured note portfolio...Not the only note I would give a client...just one bet among other bets.”

Another Citi deal

Chip Strickland, financial adviser at Foothills Financial Strategies, said he buys similar notes, which some call “snowballs.” He prefers the term “step up,” which better illustrates the incremental increase in premium.

“I do these types but with a twist. I want more frequent observation periods,” he said.

This adviser does not purchase off-the-shelf issues. He customizes his deals. He offered the example of a similar offering he did for his clients more than a week ago.

“Mine was a Citi too, three-year, autocallable monthly after six months. You get called at a 14.75% premium with a 60% barrier level,” he said.

“Granted: it was not on two broad indices but on three sector ETFs with higher volatility.”

Those are the ARK Innovation ETF, an actively managed ETF of companies engaged in “disruptive” innovation; the U.S. Global Jets ETF, which gives access to the global airline industry, and the SPDR S&P Metals and Mining ETF.

“Mine steps up every month. You either get called and get paid, or you don’t,” he said.

Quarterly standard

The monthly call dates were not his preferred choice, but it was part of the negotiation with the issuer, he said.

“We prefer quarterly observations to get interest rates juiced. It’s the sweet spot. We like quarterly best but monthly is all right. Some clients do like it. We just don’t do annual observations much,” he said.

This adviser explained why he seeks shorter intervals between determination dates.

“The more observations you put in, obviously, the more chance of getting paid sooner than when you have a long period,” he said.

“I like to add in a few more chances for an early liquidity event.

“When you get these things laddered in your portfolio, you have an opportunity to take advantage of spikes in volatility.

“It’s more nimble in a rising interest rate environment too, which I think is going to be unavoidable because inflation is already with us.”

Call protection

Strickland however does not oppose long call protection timeframes. In fact, he seeks them.

“When we customize those step ups, we make sure not to have a call in the first six to 12 months. You want to give the client at least 50% of income or growth.

“I don’t mind the one-year no-call, but after that, I’d want to have quarterly call dates.

“That way, I can go to my client and say: if it’s up in 12 months, you get 9.25%, then it rolls every 90 days. You can get called a number of times or it matures,” he said.

Other than the annual call dates, Strickland said the product was compelling.

“The 9.25% premium on two indices with a 30% protection on a four-year, that’s something at first glance that looks like a very nice deal,” he said.

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes will price on Aug. 20 and settle on Aug. 25.

The Cusip number is 17329QFZ8.

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