Citi’s $9.47 million dual directional buffer noted on S&P 500 focuses on defense, not growth

By Emma Trincal

New York, April 5 – Citigroup Global Markets Holdings Inc.’s $9.47 million of 0% dual directional buffer securities due April 4, 2024 linked to the S&P 500 index may almost be seen as a bearish play since investors will only outperform the market on the downside.

If the index’s final level is greater than its initial level, the payout at maturity will be par plus the index’s return, subject to a maximum return of 24%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index’s final level is less than or equal to its initial level but greater than or equal to its final buffer level, 85% of its initial level, the payout will be par plus the absolute value of the index’s return.

Otherwise, investors will lose 1% for every 1% that the index declines beyond 15%.

Tom Balcom, founder of 1650 Wealth Management, said the notes cap the upside return but in exchange, investors get the benefit of a buffer and absolute return within a 15% range on the downside.

“It’s more geared towards the downside protection. So, in order to get the protection and absolute return, you have to give up something,” he said.

But with a 24% cap over two years, investors are not “sacrificing” much, he noted.

“Anything over 10% a year is great in this market.”

If the index declines, noteholders will “win” in two ways.

“You’re down 20% you lose 5%. You’re down 10% you make 10%. These are great items. It’s a defensive play. You have to give up something. Your upside is limited, and you get no leverage. But your cap is high enough to make the tradeoff work,” he said.

Minor tweak

While he liked the structure, Balcom said he may want to improve it by increasing the amount of downside protection.

“I may change the terms a little bit just to get a slightly bigger buffer. Clients love the 20% number. At 20%, they feel they have a pretty solid buffer,” he said.

“It’s a minor tweak but I would probably get 50% downside participation for the absolute return. That way, I could get a larger buffer. I like that formula better than getting rid of the absolute return because you still outperform even more.”

Regardless of the buffer size, investors will outperform on the downside. But cutting the participation to generate a bigger buffer may yield to even better results, he explained.

“Take the current 15% buffer: if you’re down 18%, you lose 3%. With a 20% buffer, if you’re down 18%, you get a 9% positive return. That’s the advantage of size. People want to put as much protection in place as possible.”

Headwinds

The one-to-one participation up to a cap on the upside may disappoint more aggressive investors. But the notes were not designed to enhance the return, he said.

“You can’t be bullish. This is a note for people who are a little bit skittish. There are many reasons to be cautious in this market, especially for the next two years,” he said.

First, the notes will mature only a few months ahead of the November 2024 presidential elections.

“There’s always uncertainty when you’re approaching elections. You tend to have much more volatility,” he said.

“We’re also entering a period where the Fed is ending its support by tightening and raising interest rates.”

In this environment, market turbulence is expected.

“We’re often asked: why not use a low-cost ETF instead of structured notes? Well, if the client’s goal is capital preservation, the ETF is not the most appropriate solution. We do structured notes to provide a hedge, a protection. That’s how we add value. We provide the seat belts and the airbags for the car.”

Risk-adverse play

Donald McCoy, financial adviser at Planners Financial Services, said the notes were attractive.

“It’s almost too good to be true if you’re a risk-adverse investor,” he said.

“You’re only giving up the dividends. That’s about 2.5% over the two-year timeframe.”

Mildly bullish investors would be neutral about the cap.

“If your expectation is mid-single digit, being wrong and getting 12% a year is great. If the S&P is up 35%, you’re still getting 24%, which is close to historical levels anyway.

“In theory you may give up some of the upside. But it’s not too unrealistic to assume you may not because returns may be muted in the next couple of years. The markets are still richly valued.”

In exchange for the cap and non-payment of dividends, investors received the benefit of the absolute return delivered in a buffer format.

“A lot of people may find that attractive,” he said.

“The first 15% loss is taken care of. It’s off the books. If you’re down 16%, you only lose 1%.

“You get the buffer with the absolute return thrown in. That’s a pretty good deal.”

McCoy said the notes would be especially appealing to conservative and moderate-growth-oriented investors.

“A number of people could use it, except the bulls. If you’re a bull, stay clear of it.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Friday.

The Cusip number is 17330AT28.

The fee is 0.25%.

© 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.