Citi’s $10 million autocall on S&P ETF shows double-digit coupon, memory, but barrier is thin

By Emma Trincal

New York, April 23 – Citigroup Global Markets Holdings Inc.’s $10 million of airbag autocallable contingent yield notes with memory coupon feature due April 23, 2025 linked to the SPDR S&P 500 ETF Trust offer equity-like returns for income-seekers, but the risk lies in a small-sized barrier, according to a financial adviser.

Interest will be payable quarterly at an annualized rate of 11.2% if the ETF closes at or above its coupon barrier, 90% of the initial level, on the related observation date. Previously unpaid interest, if any, will be automatically included whenever a payment is made.

The notes will be called automatically at par plus the coupon if the shares close at or above the initial share price on any quarterly observation date.

The payout at maturity will be par plus the final coupon unless the final share price is less than the conversion price, 90% of the initial share price, in which case the payout will be a number of shares equal to $1,000 divided by the conversion price.

Not so high coupon

Jonathan Tiemann, president of Tiemann Investment Advisors, said the downside risk was concerning.

“It sounds like a deal for someone looking for higher income and willing to take the risk to get it. That type of risk is not negligible with only 10% in downside protection on a one-year. All the upside is linked to the risk of losses,” he said.

He said he had not priced the equivalent call option trade.

“I don’t know if the return you’re getting for selling this call is good or not. But 11.2% doesn’t seem very generous to me given the skinny barrier,” he said.

To collect the coupon, the underlying should not be lower than 10% on the observation date.

“It’s got to be down just a little.”

On the other hand, if the ETF is up above the coupon rate, investors will lose the benefit of the upside participation as they will be “capped” at 11.2% a year.

Downside risk

“That may work for some people who already have U.S. large cap equity exposure and want to convert it into income. But I still think that 11.2% is a bit low based on the risk you’re taking. Your risk-adjusted return is not that great.

“The barrier is a little bit thin. The memory feature helps. But at maturity, you could easily be down more than 10%,” he said.

If the notes mature, the underlying would have been negative three quarters in a row, he said.

“You may be at a high risk of losing principal at the end,” he added.

For Tiemann, the possibility of an automatic call did very little to reduce the downside risk.

“You may be called, or you may not be called. I don’t like the idea of taking that much risk at maturity for a couple of percentage points per quarter,” he said.

“The scenarios in which you get a pretty good return are few.

“I suppose this note was designed for a certain type of investor. That wouldn’t be for me.”

Good support

A trader held the opposite view.

“I’m bullish and I like this deal a lot,” he said.

“SPY closed at a 52-week high of $523.17 on March 27. That brings the barrier down to $470.85.”

SPY” is the ticker for the SPDR S&P 500 ETF Trust.

“It’s possible it could come down to that level in a quarter. But the market right now has an upper trend to it,” he added.

The ETF closed at $495.16 on Friday.

“That was just 5.35% below the high close of March 27.

“Even with that type of downturn, you get your 2.8% per quarter,” he said.

This trader was comfortable with the barrier level.

“I think $495.16 is a pretty good support. The pullback we had on Friday was the biggest scare we got from the Middle East. The disaster has been priced in. Everyone expected a big retaliation, but it did not happen,” he said.

Israel carried a strike against Iran early Friday in retaliation for Iran’s drone and missile strike on Israel.

Israel’s moderate response provided some relief in the stock market.

“The market is rallying. We rallied on Monday and we’re rallying today,” he said.

Bullish call

The autocallable feature combined with the memory gave an edge to noteholders.

“There’s definitely a 50/50 chance the Fed will ease in 2024. The stock market will view that easing positively. It gives you more of a chance of an autocall,” he said.

This trader said he was not too concerned about potential losses at maturity.

“The notes will be called before that.

“That gives you 11.2% in annual return, which is above the average return of SPY. It’s pretty good.

“Even if we muddle along between flat and -10%, we get all the coupons.

“If we rally hard and make new highs, we get autocalled and we can go back to the market if we like.

“We have more of a chance of an autocall than breaking the lower barrier.

“I see this instrument as a buy,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. and UBS Financial Services Inc. are the agents.

The notes settled on Monday.

The Cusip number is 17331N319.

The fee is 0.1%.

© 2015 Prospect News.
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