Citigroup’s $13.33 million jump autocall on iShares China Large-Cap show unusually long tenor

By Emma Trincal

New York, Sept. 18 – Citigroup Global Markets Holdings Inc.’s $13.33 million of 0% jump notes with an autocallable feature due Sept. 17, 2026 linked to the iShares China Large-Cap ETF caught market participants’ attention because of the seven-year term. especially as an autocallable, which is likely to have a shorter duration than its stated maturity, sources said.

The notes will be automatically called at par plus 11% per year if the ETF closes at or above the initial level on any quarterly determination date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the final ETF price is greater than or equal to the initial ETF share price, the payout at maturity will be par plus 77%. If the final ETF level falls but not below the 75% downside threshold, the payout will be par. Otherwise, investors will have full exposure to the ETF decline.

Bullish on China

“It’s a good size deal,” a market participant said.

Chinese stocks look cheap. The underlying ETF has gained less than 5% this year compared to the S&P 500 index up nearly 20%.

“You can make the argument that emerging markets are due to pop up at some point,” he said.

Term, barrier

The seven-year maturity was not a bad thing for cautious investors concerned about preserving their capital.

“If you want the protection, it makes more sense to have this long maturity,” he said.

“The 75% protection level along with the seven-year maturity cut some of the risk. You may not want to have that type of barrier on a two-year... it would be more [risk]-sensitive. Extending it to seven years reduces the odds of losing money at the end.

“That’s not to say you will be holding the notes for seven years. But from a risk standpoint, the long-term play makes sense.”

Investors eager to collect at least one-year worth of premium will be well served by the one-year call protection, he noted.

Cumulative premium

The long tenor offers another benefit with the so-called “snowball” feature, meaning that any missed call premium will be paid in full and retrospectively when the notes are called. This is the reason why if the “call” happens at maturity, investors will earn seven years’ worth of annual coupon or 77%.

“It’s a snowball. Locking in 11% per annum can be attractive,” he said.

Expected duration

Extending the maturity of an autocallable note may not be a concern for most investors, said Ed Condon, director at MCG Securities.

“Advisors are assuming this issue is going to be called way before the seven-year maturity,” he said.

“They believe this issue has an average life that’s much shorter than seven years.”

The underlying tactical bet itself may reflect a short-term view.

“The idea behind the China Large-Cap ETF is a bet on some type of trade deal easing up the pressure on the Chinese economy.”

“If the ETF is up at some point after one year, you’re going to get paid for it.

“The 75% barrier over seven years is a pretty reasonable risk.

“The key to that is most advisers do not expect to hold this note for seven years.”

Funding rates

Using a seven-year tenor was also part of pricing.

“Most issuers run the analysis and price where the average life is going to be. But extending the maturity is still necessary,” Condon said.

“One of the big stories is the change in interest rates and what it’s done to everybody’s funding.

“It’s forced everyone to increase the maturity because rates are so low.”

Even if the duration is likely to be much shorter than the tenor, long maturities can still enhance the structure.

“Some issuers will fund to the maturity date. I’m not sure who would do that. But that term is still going to affect the call analysis, when you calculate how often you’ll get called and how much you’ll earn,” he said.

“You’ll get better funding over seven years and if the terms are better, it will affect the call analysis.

“So, while it’s an autocall, you still need to stretch it out.”

The notes will be guaranteed by Citigroup Inc.

Morgan Stanley & Co. LLC is the agent.

The fee is 3.5%.

The notes (Cusip: 17327P468) settled on Wednesday.

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