Citigroup’s dual directional trigger PLUS linked to Euro Stoxx 50 offer ‘reasonable’ trade-off

By Emma Trincal

New York, March 30 – Citigroup Inc.’s 0% dual directional trigger Performance Leveraged Upside Securities due April 6, 2021 linked to the Euro Stoxx 50 index offer leveraged upside with no cap and a dual directional payout, features sources said are attractive enough to offset more negative aspects of the structure such as its length.

If the final index level is greater than the initial index level, the payout at maturity will be par of $10 plus 115% of the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is less than or equal to the initial index level but greater than or equal to the trigger level, the payout will be par plus the absolute value of the index return. The trigger level will be 65% of the initial index level.

If the final index level is less than the trigger level, investors will be fully exposed to the decline from the initial index level.

“I like the notes. The only issue is the six years, but all the notes that are coming out now – it’s probably due to the issue of hedging in the current rates environment – everything coming out now is five or six years,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“Europe is going to be a long-term exposure, so the timeframe of the note becomes less relevant as far as my liking a long note or not.”

Required exposure

The main question for investors is whether investing in Europe makes sense, he said.

“The Euro Stoxx 50 for all intents and purposes is the European Dow. That’s an allocation to large caps, which are less volatile in nature. You’re taking a bet on the major European corporations,” he said.

“If you want to maintain a balanced portfolio, you need exposure to international equity, and in any balanced portfolio most of your international component is going to be at least half or close to half in Europe.

“If you start with the premise that you’re going to have to be exposed to European stocks anyway, the question then becomes, what’s the best way to do it?

“You can get your exposure through an ETF, or you can do it through this derivative product.

“With this product you’re getting leverage on the upside and a barrier, which is even sweeter than a regular barrier because it gives you a positive return up to that negative 35%.

“You’re no worse than if you were long the stock. There doesn’t seem to be a real downside to it.

“If it’s something you’re going to invest in anyway, it’s a pretty innocuous way to get the exposure.”

European issues

For Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, investing in European equity involves risks, but the longer tenor may actually help reduce it.

“Obviously the challenge is that a lot is going on in Europe between Ukraine and the debt crisis in Greece,” he said.

“Then there is currency risk. If the euro continues to drop – and we may have seen the worst of it, but still – you get currency risk exposure compared to some ETFs that hedge that risk. At the same time, the lower euro versus the dollar should benefit European companies as the exchange rate facilitates their exports.”

The risk of seeing Greece exit the euro zone is an important concern.

“It’s unlikely to happen, but it could still happen. So while I like European stocks, I also know that there are a lot of risks associated with this asset class,” he said.

Time factor

But for investors who understand the risks, the six-year duration is not a real drawback, he said.

“The Euro Stoxx is a good place to put your money. The six-year term is quite long. Normally I don’t really like to be stuck in an illiquid security. But in this case, the longer duration may give the index enough time for European countries to work out the issues that are now affecting the European Union, meaning the declining euro, Ukraine, Greece,” he said.

“These issues will eventually get resolved, but it will take time.

“So in a way the six-year [term] is not such a bad thing in this case. It gives you a reasonable amount of time to see some improvements in Europe.”

Dividends

The product also offers “a good upside potential” and the benefit of the dual directional payout.

“The notes have attractive terms. You get those terms by giving up the dividends,” he said.

The Euro Stoxx 50 index offers a 3.5% dividend yield, which represents over six years about 21% in unpaid dividends.

“That’s the trade-off. In exchange, you’re getting the leverage, the no-cap, the absolute return, which is not just a 35% protection but potential gains of up to 35% on the downside,” he said.

“If you compare it with an ETF, it seems pretty reasonable to me even going out six years.”

Citigroup Inc. is the underwriter. Morgan Stanley Wealth Management is a dealer.

The notes were expected to price Tuesday.

The Cusip number is 17323B497.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.