Citi’s barrier notes with upside reset feature on S&P ETF offer novel return enhancement

By Emma Trincal

New York, Aug. 27 – Citigroup Global Markets Holdings Inc.’s barrier securities with upside reset feature proposes a newer form of return enhancement distinct from leverage or digital payouts. The feature, somewhat similar to a lookback, allows investors to calculate their return at maturity from an “upside reset barrier,” which is lower than the initial price, creating a potential bonus if the conditions for the reset are met.

The notes due Sept. 2, 2025 are linked to the SPDR S&P 500 ETF trust, according to a 424B2 filing with the Securities and Exchange Commission.

A reset event will occur if on any scheduled trading day during the observation period, from the pricing date to and including Aug. 27, 2021, the closing value of the underlying is less than the reset barrier value, which is 90% of the initial level.

Reset mechanism

Simply put, if a reset event occurs and the ETF at maturity does not breach a downside barrier (set at 80% of the initial price, point to point), investors will get a return equal to the fund’s appreciation from the 90% reset barrier, which is the equivalent of getting a 10% bonus.

For instance, if the ETF finishes at 95%, investors will receive a 5% positive return. That’s because the return is calculated from the 90% upside barrier.

If the fund finishes 20% above its initial level, the notes will return 30%.

On the downside, if the fund finishes between the 80% downside barrier and the 90% upside reset level, investors will get par.

As with any regular downside barrier, if the share price finishes below 80%, investors will be exposed to losses from the initial price.

Citi’s idea

It is not the first “upside reset” deal by Citigroup. This issuer appeared to have priced this structure for the first time in May of last year. Since then, the agent sold on the behalf of Citigroup Global Markets Holdings 24 offerings totaling more than $35 million, according to data compiled by Prospect News.

Interestingly it does not seem like other issuers or agents have attempted to replicate or mimic the structure yet.

Likely reset

“It’s an interesting note,” said Steve Doucette, financial adviser at Proctor Financial.

“The S&P can certainly drop 10% anytime in the next 12 months. In fact, it can happen in two weeks.

“So, chances are you’ll get that reset. That’s a nice feature. It gives you more on the upside by resetting the return from a lower level.”

Long tenor

But Doucette was not convinced that the terms were favorable overall.

“You lock in your money to be long the index hoping to capture that 10% outperformance, which you may or may never get because even if the reset is likely to happen, it’s still not guaranteed,” he said.

On the downside, the 80% barrier was not very robust, he added.

“I don’t see enough upside or downside protection to justify locking my money up for five years,” he said.

Back to basics

Doucette said he would prefer the classic leveraged buffered type of product.

“If I had to be holding something five years out, I may want to have 20% leverage instead.”

The “concept” of the notes however was intriguing.

“I’d probably have to do more research on it. It’s highly likely we’ll see a pullback in the market, so you could get your reset at a lower level.

“If getting that extra 10% is what you really want, then it’s probably a reasonable bet.”

Good feature

Matt Medeiros, president and chief executive of the Institute for Wealth Management, did not object to the term of the deal but said he was not sold on the downside protection.

“I do like the idea of the reset during the first year. It gives you a chance to earn a higher return. From a tax standpoint, it doesn’t change your cost basis, but from a valuation standpoint, it does. So, this is an attractive feature,” he said.

But for this adviser, the reset was perhaps the only good feature in the structure.

Barrier issue

“Typically, with a five-year note, I would prefer to have a buffer. With a barrier, the uncertainty is very high,” he said.

“If the index declines by 20%, you lose nothing. The barrier protects you. But if it drops one basis point more, you take that 20% loss.

“It makes it difficult to manage your risk, and I like to understand my risk ahead of time.”

Term, trade-off

Medeiros did not object to the tenor.

“I do like the five-year. In this uncertain environment, I prefer longer maturities, so this is not an issue for me,” he said.

But Medeiros did not like the trade-off.

“Over a five-year term, you should be able to get some significant benefits.

“The reset is not enough to make this deal particularly compelling in my opinion.

“It’s not because it’s different. The structure is not terribly complex.

“But over a five year, you should be able to get more than this reset. There are all kinds of features you may get, over five years, which I don’t find here.

“From that benefit perspective, I don’t find the notes particularly compelling,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes priced on Thursday and will settle on Sept. 1.

The Cusip number is 17324XV98.

© 2015 Prospect News.
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