Citigroup’s $64.88 million 10.76% autocalls offer short-term bet on range-bound market

By Emma Trincal

New York, Jan. 26 – Citigroup Global Markets Holdings Inc.’s $64.88 million of 10.76% autocallable equity linked securities due Jan. 24, 2025 linked to the Nasdaq-100 index, Russell 2000 index and S&P 500 index are designed for income investors betting on a range-bound market over the next 12 months, an adviser said. But the combination of a worst-of payout and short maturity adds risk to the investment, another one said.

Interest is payable monthly, and the securities will be called automatically starting July 19, 2024 at par if the price of the worst performing index is greater than or equal to its initial level on any monthly valuation date, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par if the worst performing index ends at or above its initial level or never closes below its 70% knock-in level. Otherwise, investors will lose 1% for every 1% that the worst performing index declines.

Acceptable return

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the coupon but not the timeframe of the investment.

“I’m not a big fan of worst-of notes especially with such a short tenor,” he said.

“Each of these indices represent a different risk-return objective for us. The shorter the tenor, the more risk you have.”

From a return perspective the 10.76% fixed interest rate was compelling.

“For us, the 11% coupon would be completely acceptable for the one-year period if it didn’t get called. Our return expectations for those indices are mid to high-single digits. So, this would actually be an attractive return to us,” he said.

Too short

This did not mean he would consider the notes for his portfolio.

“We just don’t make these short-term allocations,” he said.

Medeiros’ main concern was the risk of loss of principal at maturity. He considered the call as a form of risk mitigation since the early redemption guarantees par plus the monthly coupon.

“In this particular structure and because it’s such a short note, getting called would be fine,” he said.

“I think you’re taking a considerable amount of risk investing in this note. The worst-of is one aspect to it but the short tenor is an even greater risk factor. Finally, I’m not entirely comfortable with the barrier. A buffer would have been much more appropriate for a one-year note.”

Margin of safety

Jeff Pietsch, founder of Capital Advisors 360, said the notes were designed for a particular type of client.

“This is a short-term bet for people with a specific view. You need to believe that the market is stretched after this recovery and that it will trade in a reasonable range without any tail risk,” he said.

“The 70% barrier from where we are seems like a pretty good safety margin except perhaps for the Nasdaq.”

The Nasdaq was up 43% last year.

“That’s where you run the risk of a massive black swan. You could certainly have a negative market event after such a run,” he said.

Hybrid

Pietsch said the notes may appeal to investors with a mildly bullish outlook.

“It would be something appropriate for an equity investor who doesn’t expect a huge upside after the returns we had last year. In that sense it’s a pretty good deal,” he said.

But the fixed coupon suggested that the notes were primarily designed for income.

“More likely, this is an investment for a small part of the fixed-income portfolio. Meanwhile, you’re still taking equity risk for this coupon. That’s why I see it as some form of hybrid security. But chances are you will get called in six months and collect your 5.4% payment. You’ll have reinvestment risk, but you won’t have to worry about losing money at maturity,” he said.

One of the three underliers constituted the “tail risk.”

“The greatest risk on the downside comes from the Nasdaq. This is probably the index advisers need to look at the most closely,” he said.

The volatility of the tech-heavy benchmark was one thing to consider. The size of the barrier, another. Only a bear market with a drop in excess of 30% could generate losses.

Correction-proof

“I’m not worried about a bear market. I’m more worried about market noise,” he said.

“At some point we’re going to have some sort of correction and it could certainly happen in the next 12 months.”

But a correction is only a 10% decline.

“If this happens, you would still be looking pretty good with this note. You would still hold it and collect your coupon,” he said.

Pietsch concluded that the notes were only suitable for a certain kind of investor.

“This is a view-based investment. You need a strong conviction that the market is going to trade in a range over the next year. This is based on a view, not on risk tolerance as most investments are.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on Wednesday.

The Cusip number is 17291TZS0.

The fee is 0.45%.

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