Investors bid up relatively novel structure with Citi’s $48.64 million buffer autocalls on S&P

By Emma Trincal

New York, Jan. 13 – Citigroup Global Markets Holdings Inc.’s $48.64 million of 0% buffer autocallable securities due Jan. 9, 2023 linked to the S&P 500 index was the largest deal to price last week, a sign that this relatively new structure is gaining traction.

The notes will be called at par plus 7.95% if the index closes at or above its initial level on Feb. 4, 2022, according to a 424B3 filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes above its initial value, the payout at maturity will be par plus the index gain. If the index finishes flat or falls by up to 15%, the payout will be par. Otherwise, investors will be exposed to any index decline beyond 15%.

Relatively new

The hybrid structure, which offers 100% participation at maturity if the notes are not called one year after pricing, was introduced last year by JPMorgan, with Goldman Sachs following suit shortly after.

Later in the year, Credit Suisse and Morgan Stanley priced similar structures.

A market participant stressed that the notes should not be used for income given the unique observation date.

“If you don’t get called at the end of one year, you might end up with nothing. You don’t receive any coupon during the term. All I’m getting really is a 15% buffer and the possibility of an early exit with an 8% return,” he said.

The structure is the combination of two separate pieces, he said.

Call and buffer

“Just forget the autocall for a second. The notes mature. The S&P has a 1.5% yield, so you’re giving up 3%,” he said.

“On the upside you get the index return minus the dividend. There’s no leverage so you underperform the market.”

The buffered protection corresponds to a typical put spread.

“You buy a put at 100 and sell another one at 85. Nothing unusual here. Your buffer is really 12%, not 15% because you’re paying the other 3% by giving up dividends. Nothing unusual either,” he said.

Dividends

If the notes are not called, the benefit of the structure is purely defensive.

“They don’t give you anything else than a protection from minus 3% to minus 15%.

“At the end, you get an extra protection of 13% and that’s all,” he said.

The other aspect of the structure, the automatic call after one year is the equivalent of a digital.

“If you get called, you get about 8% minus the 3% they’re taking from you,” he said.

“The numbers are right otherwise nobody would do it. If a stock trades at 100, that’s based on the price people are selling it out. It’s the market. The pricing here takes into account probabilities. I’m sure you’re getting a fair deal. Does it mean you have to buy it?”

Either or

Overall, the structure was the juxtaposition of “two deals,” he said. While the terms are relatively ordinary, it’s the combination of its two main features that makes the product unusual, he noted.

The idea of being able to use the note as a growth product if there is no call is appealing, he added.

“They give you two things: the autocall, the participation at maturity with the buffer. But you don’t get both,” he said.

“You get the early exit. Or you get one-to-one at maturity with a 15% buffer.

“It’s not really one deal. It’s two deals. You get either one of them.”

Not for everybody

An industry source, who has not seen the coupon-plus-participation configuration before said the deal was “too complicated.”

“There are a lot of moving parts. I don’t like too many contingencies,” this source said.

“I did a three-year autocall on Twitter. 65% barrier, quarterly with the same barrier at maturity. It’s a 9% coupon and I can price it at 96.5, 97.

“I can make it at 60% with a 97.75 price.

“It’s a simple autocall. You know what you’re getting.

“Look, there’s something for everybody. This one is too complicated. It’s just not for me.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on Monday.

The Cusip number is 17328YEW0.

The fee is 0.117%.

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