Citi’s $1.3 million dual directional digitals on S&P aimed at conservative, agnostic investors

By Emma Trincal

New York, Oct. 12 – Citigroup Global Markets Holdings Inc.’s $1.3 million of 0% dual directional barrier digital plus securities due Oct. 8, 2027 linked to the S&P 500 index should appeal to risk-averse investors, an adviser said. The note is also designed to cover many different market scenarios, a plus for those lacking conviction, a trader said.

If the index finishes at or above its initial level, the payout at maturity will be par plus the greater of the digital return of 43.75% and the return of the index, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 30%, the payout will be par plus the absolute value of the index return.

Otherwise, investors will lose 1% for every 1% decline of the index from its initial level.

Defensive play

“I like it,” said Lance Roberts, chief investment officer at RIA Advisors.

“The odds that the S&P would be down more than 30% in five years are slim. Obviously, it’s not impossible but it’s not probable. So, the barrier level offers a sound protection.

“The upside is decent because the market has been under so much pressure.

“For a super conservative investor, it’s a way to put money to work without a whole lot of downside risk.”

Not for bulls

The notes would not be recommended to more aggressive investors, however.

“If you’re bullish, you would probably regret buying this. Over the next five years, the market will perform substantially better than this year,” he said.

Since the upside is uncapped, noteholders would be underperforming in a bull market due to the absence of dividends for five years.

“You need to take into account the fact that dividend yields will increase as the market bottoms.”

“For very risk-averse investors, it’s a decent opportunity because your downside protection is significant. I don’t see anything grossly wrong with it.

“For me, it’s not great. But I know a lot of clients who would be interested in that,” he said.

Capping or not capping

Brady Beals, director, sales and product origination at Luma Financial Technologies, said he trades a fair number of digital notes for his clients. The difference between this structure, which has no cap, and the more common capped digital product is something investors need to pay attention to, he said.

“Capped or uncapped digital...It’s going to depend on your market outlook. If you’re bullish, you’re better off with a leveraged note. The uncapped won’t give you as much return, he said.

Beals said he often picks capped versus uncapped digital structures.

“If you cap your return, you get compensated for giving up the upside; so, obviously you’ll get a higher coupon,” he said.

Another risk with uncapped digital notes is to underperform the price return of the underlying index if the payout is too low.

Putting it back

In general, digital notes trade more easily in the secondary market compared to income products, he said.

“If we have a very strong performance in the next two to three years, if the note trades at 13% or 14% a year, you can easily liquidate it back to the issuer and sell it well above par. You’re getting a put option that allows you to put it back to the issuer whenever you feel like it.”

In comparison, callable notes may not offer the same benefits since investors only receive par plus a coupon upon the call.

With issuer calls, the flexibility is even more limited.

“Whenever a callable note is trading around par or less, it’s up to the issuer to call it,” he said.

Covering all the bases

The 70% barrier with absolute return was a valuable feature offered by the issuer. But Beals questioned the rationale behind the overall structure.

“Alright, so this covers the downside down to the barrier level,” he said.

“But you’re really spreading things across the board. It looks like the note was designed for people who don’t have a lot of conviction about what the market is going to do.

“You have four scenarios: market up a lot, market slightly up, market slightly down and market down a lot.

“You’re hedging three of the four scenarios, the unhedged one being when the barrier is breached. But you’re not benefiting as much from three of the four scenarios because you’re trying to cover everything.

“This note is for someone who doesn’t have a specific market outlook.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Tuesday.

The Cusip number is 17330RWK7.

The fee is 1.125%.

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