Citi’s $2.66 million autocalls on stocks show new conditions for early redemption via knock in

By Emma Trincal

New York, March 18 – Citigroup Global Markets Holdings Inc.’s $2.66 million of 0% autocallable securities due March 6, 2028 linked to the common stocks of worst performing of Adobe Inc., Advanced Micro Devices, Inc. and Netflix, Inc. redefined new rules to meet the requirements for an automatic call in a worst-of.

Instead of the three stocks having to be all above the call strike simultaneously on the call date, the observation can be spread out in time one stock at a time, according to a 424B2 filing with the Securities and Exchange Commission.

The return of the note will be based on whether each single stock knocks in on any monthly valuation date starting after one year.

To knock in, a stock needs to close at least once above 85% of its initial level on one of those monthly dates.

If all three stocks have knocked in, the securities will be called automatically at par plus an annualized 23.15% premium starting March 4, 2025 and on any subsequent monthly review date, including the maturity date when the premium would be 92.6002%.

If any of the three stocks did not knock in, the payout at maturity will be par if all three stocks close above the 60% downside barrier.

Otherwise, investors will be fully exposed to the losses of the worst performer.

Real estate-like

Jerry Verseput, president of Veripax Wealth Management, looked at the call premium with caution.

“If someone wants a 23% return there are only a couple of ways to do that. The most direct way is with real estate development,” he said.

“But in real estate you’re tied in for a long time with more risk.

“With this note, you’re in the realm of real estate returns. And it’s much easier to access than real estate.”

Investors could get called at the soonest opportunity and pocket a 23% gain in just one year, he said.

“But there is risk. You have individual company risk regardless of what the market does,” he said.

Verseput recognized that the call was activated in a very different way than in most snowballs.

To begin with, the call threshold was below the initial price at 85%. But more importantly, the “knock in” feature made the structure entirely novel compared to similar notes.

“You get one stock to be knocked in. Then the note keeps going. You only have to worry about the two other stocks.

“You gradually eliminate some names,” he said.

The feature had an impact on the duration of the product, he added.

“With a normal worst-of, all three stocks have to be above the barrier at the same time. Here it’s easier since you’re looking at one at a time. It can be more at one time. But they don’t have to be up simultaneously.

“That knock-in mechanism makes the note redeem earlier,” he said.

The result was less risk, he added.

All about stocks

“Less risk. So how do you get a 23% premium? It’s totally based on the three stocks.

“All three stocks have gone up tremendously from their lows,” he said.

Adobe is up 87% from its low of October 2022; Advanced Micro Devices, which bottomed at the same time, has since climbed 254%; and Netflix has jumped 279% from its May 2022 low.

“When a stock goes up that much it tends to easily fall back down quickly,” he said.

“There’s huge volatility in those names.

“A 15% drop on a stock that has risen that much over the past year-and-a-half is nothing.

“Even 40% wouldn’t be unheard of.”

Company risk

He gave an example.

Advanced Micro Devices priced at $202.64 on the trade date, bringing the 60% barrier price to $121.58.

“In October 2022, it was at 55. There’s a real danger that it could fall that much over the next four years,” he said.

A big price move reduced the odds of an early redemption, he noted.

“I’m really thinking in terms of company risk, not just market risk. I mean, you don’t need to be bearish on the market to be concerned about those three high-flyers,” he said.

He cited headline risk for Tesla when Elon Musk bought Twitter or the boycott against Anheuser-Busch last year.

“Each one of those three companies represents a specific business model. You have to believe in the sustainable business model of those three companies,” he said.

High risk tolerance

Verseput said the notes were too risky for most of his clients.

“There is no free money,” he said.

“When you get that kind of premium, the note is going to be high risk.

“I wouldn’t show it across a broad spectrum of clients.

“It doesn’t mean I don’t like it.

“For a speculative bet, the 23% return is OK if you understand the risk.”

One out of three

Julian Rubinstein, chief executive of American Asset Management, emphasized the specific danger of getting exposure to one of the names.

“The structure is certainly very innovative,” he said.

“But AMD is too volatile. That’s what drives this trade. It has outperformed a lot.”

“AMD” is the ticker for Advanced Micro Devices.

On four-year rolling periods the stock has breached the 60% barrier 30% of the time,” he said, based on data going back to 1989.

“For me, AMD is the main obstacle. The other two are fine. Netflix has always been a winner,” he said.

The adviser warned against eye-catching returns.

Win versus loss

“If you see such a high coupon, you have to look at the other side. When you’re shown a 23% return, the opposite side is telling you that it’s a dangerous trade. It’s just too good to be true,” he said.

The implied volatility of Advanced Micro Devices is 45%.

“It’s a very volatile stock,” he said.

“Someone on the trading desk is betting that AMD is going to crash. That’s really what it is.”

Such a bet would suggest that the autocall could not occur given the extent of the drawdown.

“They’re betting that in four years, it’s going to be below 60% ... a loss of at least 40% for you.

“That’s the other side of the trade.

“As an investor, your view is the opposite. You’re bullish on AMD. It’s a way for you to make 23%. You’re all excited about it.

“I’m not. I wouldn’t touch it,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on March 6.

The Cusip number is 17291LTU9.

The fee is 0%.

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