Citigroup's $60.66 million 9.5% ELKS tied to Wells Fargo offer attractive return, sources say

By Emma Trincal

New York, Dec. 1 - Citigroup Funding Inc.'s $60.66 million of 9.5% Equity LinKed Securities due May 25, 2011 linked to Wells Fargo & Co. shares appealed to investors given the current stock price and the name of the underlying bank, sources said, adding that the deal offered good value.

"I don't think it's a bad deal. It's a pretty good return, and there's not a terrible downside," a trader said.

The payout at maturity will be par in cash unless Wells Fargo shares fall below the protection price of $21.44, 80% of the initial price, during the life of the notes and finish below the initial price, in which case the payout will be 0.37313 shares of Wells Fargo stock, according to a 424B2 filing with the Securities and Exchange Commission.

"Nine-and-a-half percent per year is a pretty good coupon in this environment. It's not bad given that Wells Fargo is one of the best banks," said Tom Livingston, director of structured products at Halliday Financial Corp.

"The notes priced Nov. 23 when the stock closed at $27.00. So you'd hit the threshold if the stock went down 20% to $21.60," noted Livingston. "What's the likelihood that the stock is going to break its 52-week low?"

The share price hit its 52-week low of $23.02 in August.

The 52-week high of $34.25 was reached in May.

The stock has been trading sideways, sources noted. The share price is up 2% so far this year and down 1.65% over the past 12 months.

"That's a reasonable bet for a six-month. The shares are probably going to trade within the $27-$32 band," Livingston said.

Good risk/return

The trader said that the risk/return profile should be attractive to risk-adverse investors.

"I don't think Wells Fargo is going to drop by 20% in the next six months," he said.

"The last time it got there was on an intraday basis in June 18, 2009. So it's not going to break through 18 months of price action with a lot of support.

"But let's say for the sake of it that it breaks the 20% threshold. They give you the shares, and Wells Fargo is not going away. It's different from losing your principal.

"Of course, another risk is the cap. You could make more than the coupon. But 4.75% for six months is pretty decent in this market.

"I have a higher risk profile, but if I didn't, I would seriously be looking at that piece of paper."

Citigroup Global Markets Inc. is the agent.

© 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.