Citigroup’s stock basket-linked notes with 90% protection fit conservative, nearly bearish play

By Emma Trincal

New York, Sept. 24 – Citigroup Inc.’s 0% market-linked notes due Oct. 2, 2020 linked to an equally weighted basket of seven stocks offer nearly full principal protection with a one-to-one capped upside, making the notes particularly attractive for skittish, even bearish investors, financial advisers said.

The underlying companies are Boeing Co., Coca-Cola Co., Colgate-Palmolive Co., Deere & Co., General Motors Co., Hershey Co. and Procter & Gamble Co., according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any basket gain, up to a maximum return of 40% to 45%. If the basket falls, the payout will be par plus the return with a minimum payout of 90% of par.

Steve Doucette, financial adviser at Proctor Financial, said that the notes are so defensive that it makes little sense in his view for anyone other than a bear to buy them.

“I can’t see anything but a bearish five-year outlook in this thing,” he said.

“You expect the stocks to be down 10% in five years, otherwise you’re one-to-one capped and you’re giving up the dividends. These are all high-dividend-paying stocks.”

The average yield for the basket is 3.22%. The highest-yielding stock in it is GM with a 4.72% dividend yield. Colgate Palmolive’s 2.42% yield is the lowest one of the seven.

“The only plausible outcome is to wish for the stocks to lose at least 10% or even more. That’s the only way you can outperform the stocks. If you don’t have that type of bearish view, why would you eliminate the dividends and cap yourself at 8% or 9% a year?” he said.

“I can’t find any reason to really like it. Even if you outperform the stocks on the downside, you’re still taking on losses by definition. Unlike a buffer you are guaranteed to be taking on the first 10% losses ... especially five years out, it’s a long time. It’s one thing on a two- or three-year note, but not on a five-year.”

Protection wanted

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes offer an appealing level of protection.

“I like it,” he said.

“Over the next five years, I like the large-cap stocks. The cap on the upside is reasonable and within my growth expectations.

“This type of structure with that particular length should be a good investment in this type of market.

“I like the idea of being able to participate in large-cap stocks when my maximum downside is 10%.

“There is an upside cap too, but my upside cap is within the margin of my return expectations.”

Medeiros added that the notes are fairly priced.

The underwriting fee is 2.5%, according to the prospectus.

“Sometimes longer-dated notes can be expensive, but this one at 50 basis points a year is reasonable,” he said.

“The credit exposure is certainly a risk you would want to monitor. Anytime you have a longer duration, you definitely want to manage the credit risk.

“But I like the notes for the protection level. For 50 bps a year, my downside cap is 10%. If the market is down 15% or 20%, my maximum loss is 10%. I’m good with that.”

Citigroup Global Markets Inc. is the agent.

The notes will price Tuesday.

The Cusip number is 17298C2N7.

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