Citigroup’s barrier securities linked to S&P 500, Russell offer high leverage, deep barrier

By Emma Trincal

New York, June 13 – Citigroup Global Markets Holdings Inc.’s 0% barrier securities due July 3, 2024 linked to the worse performing of the S&P 500 index and the Russell 2000 index are designed for long-term and conservative investors who do not expect high returns in the years ahead, advisers said. But as with any structured product, timing the trade is the hard part.

The payout at maturity will be par plus 350% to 450% of any gain of the worse-performing index, up to a maximum return of 60%. The exact leverage will be set at pricing.

If the worse-performing index falls by up to 40%, the payout will be par. Otherwise, investors will be fully exposed to the decline of the worse-performing index.

Mildly bullish view

Scott Cramer, president of Cramer & Rauchegger, Inc., pointed to the benefit of having high leverage when market expectations are moderately bullish.

“With four times the upside, you get to the cap pretty easily. The index doesn’t have to go up that much,” he said.

At the midpoint of the announced leverage range, a four times multiple for this maturity and cap would take investors to the cap with an index growth of only 2.83% a year. The maximum return would be 9.86% on an annualized compounded basis.

“If you think the market is not going to go up much, this is a great way to get a good return,” he said.

“Is it worth capping the upside at 60% to get the barrier? The barrier is the sweetener for the deal. Otherwise you can just go long and buy a leveraged ETF.”

High correlation

Another advantage of the notes was the high correlation between the two underlying indexes. Since investors get exposure to the worst of the two, more correlation means less dispersion risk, he explained.

“We’re not dealing with two uncorrelated indices. We’re dealing with indices that are somewhat similar. The downside risk is very similar to each index,” he said.

For investors seeking this type of return and downside protection, extending the maturity to five years is part of the trade-off.

Long tenor

Cramer expressed some reservation about the point-to-point investment compared to buying an index fund.

“This is a five-year product,” he said.

“You have to be willing to be stuck for five years. Unfortunately, your payout depends on the price at maturity. It’s an observation on one given day. There is no smoothing, no averaging. That’s the risk,” he said.

This adviser stressed the uncertainty attached to what will come after the presidential election.

“Politically – and I’m not doing politics here – we probably have through November of next year. They’ll do everything to get the economy propped up because they want to be elected in 16 months,” he said.

“But after that we don’t know. The political motivation to keep the economy running won’t be there.

“I don’t think China will push us into a recession. We’re nowhere near that.

“Right now our economy is doing well, but you have to be willing to take the cycle risk. A recession could push this below 40%.”

Regardless of the current environment, most structured notes investment decisions require a good sense of timing.

“The problem is that your return depends on what happens at a definite point in time,” he said.

“Do I think 4x leverage on the upside with a 40% downside protection is good? Yes, it seems like a good trade-off.

“The risk is you mistime this, and there is nothing you can do about it.”

Enough time to rebound

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said the note offered a good profile for investors inclined to minimize risk.

The five-year term was more of a risk-mitigating factor in his view than a concern.

“For the term, I tend to view it as where we are in the economic cycle,” he said.

“We are somewhere in the eight or ninth inning.

“If we have a market pullback or recession a year from now for instance that, say, lasts a year and a half, that’s giving us another two and a half years to climb back.”

Picking the loser

The combination of the large-cap and small-cap indexes was also welcomed.

“As far as American market exposure, those two indices are well suited,” he said.

Pool said the S&P 500 is probably a “stronger, more resilient” index.

“I would have to run the charts. But since it’s a worst of, I would think the index to watch would be the Russell 2000 as it’s likely to be more volatile if the market goes down.”

Barrier

The tenor and the barrier offered benefits for a defensive play.

“It’s somewhat more on the conservative side to me, which we like,” he said.

“As a five year, this would be a good fit.

“Not only is the 40% soft protection substantial, but the U.S. economic cycle gives us enough time to get back on our feet.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will price June 28.

The Cusip number is 17326Y2L9.

© 2015 Prospect News.
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