Citi’s $1.29 million of autocalls on stocks bring novel contingency feature for coupon payment

By Emma Trincal

New York, Feb. 29 – Citigroup Global Markets Holdings Inc.’s $1.29 million of autocallable equity-linked securities due Feb. 26, 2026 linked to the common stocks of Alphabet Inc., Deere & Co. and UnitedHealth Group Inc. introduced a new condition for the payment of a contingent coupon, which eliminated the need for a coupon barrier.

The notes will pay a quarterly fixed coupon of 9% as well as a potential quarterly contingent coupon of 3% per year, according to a 424B2 filing with the Securities and Exchange Commission.

The 3% contingent coupon is paid if all three stocks beat the S&P 500 index on the related quarterly valuation date, meaning that the return of the worst performer is better than the return of the index. Previously unpaid coupons will also be paid.

The securities will be called automatically at par plus any coupon due if each stock closes at or above its initial level, on any quarterly potential autocall date starting after six months.

The payout at maturity will be par if the worst performing stock ends at or above its 60% final barrier.

New feature

“It’s a new added feature. It’s not about being above the coupon barrier. You have to outperform the S&P. I haven’t seen that before,” a structurer said.

“The 3% is kind of a bonus. Bonuses are not new. But the contingency feature is.”

The 3% contingent coupon did not seem very significant, he said, although, if paid entirely, it raised the entire return to 12% a year. The outperformance condition to receive the additional 3% was probably not easy to meet, he noted. But the payment of previously unpaid coupons helped.

“The kicker has a memory. Maybe the worst-of doesn’t outperform but it does later. You get the contingent coupon,” he said.

However, the potential bonus came at a cost.

“You have to pay for that extra 3%,” he said.

“If I was a client looking at this note I would want to know how much I would get if I got rid of the 3% bonus.”

He priced a traditional two-year fixed coupon barrier note linked to the same three stocks and found (without the S&P 500 index feature) a fixed rate of 10% per year.

“I used a different issuer and a different date so it’s not exactly apples-to-apples, but it gives you an idea,” he said.

“You get an extra point by getting rid of the 3% bump.”

Three sectors

He explained why he would prefer to have a 10% fixed rate rather than a hypothetical 12% return.

“In order to get your potential 12%, all three stocks have to outperform the market and they’re so uncorrelated,” he said.

“Those three names are in three different sectors – health care, industrials and communications services.

“Typically, not all sectors outperform the index. The average is what makes up the index.”

The coefficients of correlations between the stocks are on the low end of spectrum, ranging from 0.20 to 0.36 with 1 representing a perfect correlation.

“Just give me 10% without the kicker and I don’t have to worry about the three uncorrelated stocks having to outperform the market. It would be nice to have 12%, but I’d rather have a fixed coupon greater than 9%.

“It’s interesting. I’ll leave it at that,” he said.

Complexity

Julian Rubinstein, chief executive of American Asset Management, would restructure the payout along the same lines.

“The 9% fixed return is good. But the 3% is unnecessary. You could get more than 9% without the contingency,” he said.

“It’s a way to tell a client they can get a 9% guaranteed with a shot at making 12%.

“Personally, I’d rather get rid of that 3% and get more on the fixed rate.”

Rubinstein said he liked the three underlying stocks.

“I like them all. Historically they haven’t dropped more than 40% over that two-year span. It seems pretty solid to me,” he said.

The necessity for the worst-of to outperform the S&P 500 in order to get the additional income may also be confusing when talking to clients, he said.

“The terms described to obtain the extra 3% are hard to explain. It’s too complicated for a client,” he said.

“I like the stocks. The structure could be improved.”

Risky exposure

A financial adviser said that exposure to stocks, especially in a worst-of, was too risky.

“A lot of bells and whistles... One likely scenario: you get called in six months with 4.5%.”

But if the notes mature, investors will face significant risks, he added.

“There’s a 60% barrier. That’s great for indices but not for stocks. I’m not a fan of single names, especially three names with my return tied to the worst of the three.

“You’re throwing the dice here. You’re giving up a healthy income return for an equity-based return,” he said.

Investors have better alternatives in fixed income, he noted, pointing to bond funds offering “reasonable” yields.

“Some are risky but probably not as risky as subjecting yourself to the risk of single stocks.

“There are some high-yield bonds or bank loan funds out there that pay 8% to 9%; on a more conservative side, you can find bond funds yielding 5% to 6%.

“I’d rather get a little less without taking the equity risk,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on Monday.

The Cusip number is 17331AQW4.

The fee is 1.75%.

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