Advisers say Citi’s $30 million autocalls on growth, tech indexes meet many ‘buy’ conditions

By Emma Trincal

New York, March 3 – Advisers were not surprised by the size of Citigroup Global Markets Holdings Inc.’s $30 million of 0% autocallable barrier securities due Aug. 28, 2025 linked to the performance of the MSCI World Information Technology index, the PHLX Semiconductor Sector index and the Russell 1000 Growth index pointing to the structure and underlying investment theme of the deal.

The notes will be automatically redeemed at par plus a 19% call premium if all indexes close at or above their initial levels on Feb. 24, 2023, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and all indexes finish at or above their initial levels, the payout at maturity will be par plus 153.5% of the return of the least performing index.

If the worst performer declines but finishes above 80% of its initial level, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline of the worst performer from its initial level.

Positive outcomes

“I like the structure,” said Steve Doucette, financial adviser at Proctor Financial.

“19% annualized return, if called, it’s pretty good. You have three-and-a-half year to go through. That’s a market cycle. And if you’re not called, you have this 1.5 leverage. Assuming things go wrong, you still have that 80% barrier, which would at least allow you to get your money back.”

He did not rule out the worst-case scenario.

“That’s if you finish below the barrier. Then you’re long the worst index,” he said.

But breaching the barrier at maturity is always a risk with structured notes, he said. Overall, the potential for positive returns was enticing.

“I like this note because you get pretty good odds of outperforming in either direction. That’s what I’m always looking for,” he said.

Know your underlying

The choice of the three underlying indexes for the worst-of, however, required more research.

“The only thing I would worry about is the exposure. You do have to do your due diligence on those three indices. I don’t know what the MSCI World Information Technology index is for instance,” he said.

“And what’s in the PHLX Semiconductor index? You have to see.”

He pointed to Intel, the second largest constituent of the PHLX Semiconductor Sector index with an 8% weighting.

“Intel is down 30% from a year ago. Is it really a good play at this point? I would want to make sure there isn’t too much overlap. You have to look at all three indices and check the different names. Are you overexposing yourself to just a few stocks?” he said.

Most of the stocks covered by the three indexes are in the technology sector. The Russell 1000 Growth index itself allocates 46% to the technology sector.

“Tech is a hot space except we don’t know what it will be like in three-and-a-half years. Take the semiconductors. We have a shortage of chips. Will supply issues be resolved then? We don’t know.”

Risk-adjusted return

Investors also had to consider the risks associated with the payout structure.

“If any of those three is down, you get the exposure to the worst-of. That’s always an additional risk. You have to look at the correlations,” he said.

“Now, are you going to be down more than 20% three-and-a-half years from now? I tend to doubt it.

“But again. It all comes down to your due diligence,” he said. “So, the question really is: how much risk are you willing to take?”

If investors do take the risk, they get fairly compensated for it, according to this adviser.

“The call premium is huge. It’s probably because these are volatile indices.

“Of course, you may not want to be called.

“But who’s going to complain if you’re getting kicked out a year from now with a 19% return? It’s a pretty good payment,” he said.

Time premium

If the notes do not get called, investors should try and measure the risk of breaching the 20% threshold at maturity.

“If you don’t get called, you have another two-and-a-half [year] market risk exposure,” he said.

“It looks like it’s a reasonable amount of time.

“The way you minimize market risk is to add time. The question is: what’s the definition of time?

“I think that two-and-a-half years is sufficient. By then, chances are the market will have recovered from the decline that made you miss the call in the first place.”

Terms

Matt Medeiros, president and chief executive at the Institute for Wealth Management, expressed a positive view on the notes as well, but his focus was on the underlying exposure.

“Usually, I don’t like worst-of notes. This one is interesting though because you have three relatively correlated indices in an area, which I think offer some opportunities,” he said.

“The growth components look appealing to me.”

The one-year call paid a surprisingly attractive call premium, he added.

“19% is a great return. I’m not sure how they were able to price it, but it’s compelling.

“If you’re not called, the leverage is an interesting kicker.”

Medeiros said he particularly appreciated the uncapped upside.

“When I look at growth indices, I really don’t like having a cap on, so this structure is in line with what I want in a note,” he said.

High correlations

Medeiros said he usually does not look at worst-of notes, but when he does, he seeks highly correlated underlying assets in order to minimize dispersion risk. The notes seem to fit that profile, he said.

The MSCI World Information Technology index covers the large and mid-cap segments across 23 developed markets countries. But its top holdings, such as Apple, Microsoft and Nvidia, are U.S. companies, he noted.

“So right there, you have some correlation despite the U.S./non-U.S. split,” he said.

In addition, even U.S. companies themselves are international conglomerates.

“Honestly if you look at the larger caps like the stocks in the Russell 1000 Growth index, a lot are deriving a great portion of their revenues from outside of the U.S. If you call Amazon a domestic stock, it’s almost misleading,” he said.

With the three indexes covering essentially a large-cap, growth and technology-oriented universe, the risk of divergences of returns were minimized, he said.

“Correlations seem to be pretty high. The sector is promising. I do like the note,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Feb. 28.

The Cusip number is 17330AHB1.

The fee is 3.75%.

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