Citigroup’s geared autocallable buffer notes on S&P 500 designed to outperform the market

By Emma Trincal

New York, July 26 – Citigroup Global Markets Holdings Inc.’s upcoming 0% geared autocallable buffer securities due Aug. 5, 2026 linked to the S&P 500 index offer investors several opportunities to beat the index, a financial adviser said.

The notes will be called at par plus 10.5% if the index closes at or above its initial level on July 31, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.4 times any index gain.

Investors will receive par if the index falls by up to 20% and will lose 1.25% for every 1% that the index declines beyond 20%.

Longer is better

“I would prefer to go five years,” the financial adviser said.

He said he was buying a similar product from BNP Paribas. His note is also linked to the S&P 500 index and shows the same 20% geared buffer. But the term is five years and the uncapped return at maturity is 2x the index gain.

“My note gives me a one-time autocall after two years. My call premium is 22.75%, which is essentially 10% a year,” he said.

“I like the longer durations because you can get significantly more leverage on the upside.

“You also have more time to yield more return if you miss the call.”

Know your goal

By nature, this structure dubbed “catapult” in the marketplace is a hybrid product. It offers either a fixed return or unlimited leveraged upside depending on whether the notes get called or not. A couple of years ago, those notes were principal-protected. They now tend to come with a buffer.

For this adviser, it’s important for buyers to understand the purpose of those “catapults.”

The rationale behind this structure is to “beat” the S&P, he said.

“You’ll beat the index on the upside with the uncapped leverage. You’ll beat it on the downside with the buffer.

“The only time that the note fails to achieve this goal is if you get called and the market is higher than the premium.

“In this case, your failure scenario is to get 10.5% in a year while the market is higher. Is that a really terrible thing?” he said.

In exchange of the “FOMO” risk of underperforming the index, investors get a 20% buffer and possibly uncapped leverage at maturity, he added.

The acronym “FOMO” stands for “fear of missing out.”

No apologies

Those “catapults” were designed to price uncapped upside leverage without extending maturities too far, he explained. But some investors buy the products hoping to enjoy the upside payout at maturity and hoping to miss the call. For some, the call premium is viewed as an undesirable cap.

“The bank can only do what it can to give you this leverage, no-cap with that level of protection,” he said.

“Of course, you always have clients who will be disappointed to get the 10% if the market does much better.

“As a fiduciary, I’m not going to apologize for a 10% return that had a fraction of the risk of being long the index.”

Investors have to know what they’re trying to accomplish when buying those kinds of notes, he added.

“You want to outperform the market and chances are that you will.

“You beat the downside with the buffer. It’s phenomenal. You outperform the upside with the leverage and it’s more impressive now that the dividend on the S&P is so low,” he said.

“You just have to be willing to underperform if you get called and if the premium is less than the market.”

Getting paid first

A market participant had a different view.

“Show me a regular autocall, same maturity, same buffer. I don’t want this call after one year without knowing what my outcome is going to be at maturity if I keep on holding the notes,” he said.

He would compare the call premium of the notes with that of a typical three-year autocall with quarterly or semiannually observations.

“I guarantee you the premium on a straight autocall would be higher because it’s a straightforward income product. You’re not shooting for the moon; you’re not seeking unlimited upside,” he said.

This market participant admitted that his judgment was a matter of opinion.

“It makes more sense to me. I like to get my money upfront. I’m a big fan of getting my money as soon as possible,” he said.

All and none

One main risk with the “catapult” structure was to have a reduced participation if the index had insufficient time to grow from being negative on the call date to maturity.

“There is no panacea product,” he said.

“This one gives everything and nothing. Is it an autocall? Is it growth? Maybe it’s none of the above. They’re taking one side to give you the other side. If you want income, get an income note. If you want leverage, go for it. Don’t try to do two things at the same time.

“It’s just my opinion.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will price on July 31 and settle on Aug. 3.

The Cusip number is 17291RRD6.

© 2015 Prospect News.
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