Citigroup’s barrier notes tied to iShares MSCI EM ETF could use a buffer, advisers say

By Emma Trincal

New York, May 31 – Citigroup Global Markets Holdings Inc.’s 0% barrier securities due June 1, 2021 linked to the iShares MSCI Emerging Markets exchange-traded fund could use a buffer, advisers say.

If the final share price is greater than or equal to the initial share price, the payout at maturity will be par plus 180% of the ETF return up to a 27% to 30% maximum return. The exact cap will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the final share price is less than the initial share price but greater than or equal to the 80% barrier price, the payout will be par.

If the final share price is less than the barrier price, investors will receive a number of shares equal to the principal divided by the initial share price or the cash equivalent.

Terms not ‘greedy’

“Emerging markets had a nice run up in 2017. It was up 36.5%. It was a great year. This year it’s down 0.4%. It’s a very volatile asset class,” a financial adviser said.

If the cap is priced at the midpoint of the range, or 28.5%, investors would get 8.7% in annualized compounded maximum return.

“You can hit this cap if the index is up 5%. It’s not a lot but I would be OK with that given the huge gains we had last year,” he said.

For this adviser risk control is a priority.

“We don’t want to be greedy. We just have to educate the end-user and tell them the reasons why they have to give up some of the upside. There’s a tradeoff. They get the downside protection.”

Barrier is not best

Unfortunately, the 20% contingent protection was not sufficient and adequate for his clients.

“Emerging markets can have huge price swings up and down,” he said.

In 2008 for instance the iShares MSCI Emerging Markets fund dropped 50% while the S&P 500 index lost 37%.

In the recent years, the emerging markets fund did not incur severe losses, except for a 15.4% decline in 2015. So far, the performance has been muted and slightly negative.

“This note offers protection. But it’s a barrier,” he said.

“You have 20%. Beyond that, you’re long the index. The index could certainly be down more than 20% in three years.

“I like the upside, not the downside.

“I’d prefer a buffer.”

Some of this adviser’s clients are more aggressive and would be satisfied with the downside as it is. But in general, they tend to be more conservative.

“If I wanted to buy this note, I definitely would want a buffer. If it means a lower cap, fine. I could consider that.

“We try to preserve capital,” he said.

Subdued return

Steve Doucette, financial adviser at Proctor Financial, said he would prefer a buffer too, although his main concern was the cap.

“You have a 20% protection. It might go down less than that and you might be OK.

“If the market is down below 80% you’re fully exposed to the downside.

“I would be more comfortable having a buffer,” he said.

The note’s biggest drawback was the limitation on the upside.

“If the market is up this note will be capping you out at 10% a year on what has been an underperforming asset class up until last year,” he said.

Bullish outlook

Despite last year’s strong performance, he said that it has taken the index some time to “catch up” with the U.S. equity markets.

“This index has been nowhere near up as high as the S&P in the last three years,” he said.

Doucette said he believes in trend reversal. For that reason, he is inclined to be bullish on emerging markets.

“On the upside, you’re going to hit that cap awfully quick.

“I’m capped out more prematurely than I want to be,” he said.

Restructuring

Getting a higher cap and a buffer may not be achievable without making significant changes in the structure, he said.

“You’re not going to get a lot of pull in either direction.

“You’re probably going to have to go out a little longer than three years.

“And if you want a decent cap plus a buffer, you’ll have to give up some leverage too,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes (Cusip: 17324XJF8) will settle on June 4.

© 2015 Prospect News.
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