Citi’s $30.9 million absolute return notes on S&P 500 offer principal protection, bonus

By Emma Trincal

New York, June 22 – Citigroup Global Markets Holdings Inc.’s $30.9 million of 0% absolute return trigger notes due June 12, 2024 linked to the S&P 500 index provide a hedge for investors concerned about protecting their principal with absolute returns of up to 20% regardless of the market’s direction.

A barrier event occurs if the closing level of the index is above or at its initial level by more than 20% or below its initial level by more than 20% on any day during the life of the notes, according to a 424B2 filing with the Securities and Exchange Commission.

If a barrier event has occurred, the payout at maturity will be par plus 5.75%.

If a barrier event has not occurred, the payout will be par plus the absolute value of the index return, subject of floor of par and cap of 20%.

Full protection

Brady Beals, director, sales and product origination at Luma Financial Technologies, said there is a need for principal-protected structures in today’s market.

“For a conservative investor with a bearish bias, you definitely want that kind of return profile. The principal-protection is what’s appealing to risk-averse investors,” he said.

Investors are taking advantage of the increased volatility to generate returns on both sides of the market.

“The trade consists of buying an at-the-money put and an at-the-money call with two knock in on each side of it at the 20% strike,” he said.

“The 5.75% return is not stellar but most principal-protected notes only give you par back. At least you are guaranteed the 5.75% bonus no matter what. It’s pretty attractive given the full protection.”

The bonus itself does not take away the potential to earn 20% on both sides of the trade if the market is not overly choppy, he added.

Directionless bet

The embedded bet of the notes is that volatility will remain contained.

“Give or take, it’s a short straddle sort of,” he said.

A short straddle is an option trade which consists of simultaneously writing a call and writing a put on the same underlying stock, at the same strike price and for the same length of time.

Investors make money when the stock trades in a range between the two strikes.

“With this note, you’re hoping the market will be directionless in the next couple of years. Hopefully none of the barriers will be breached,” he said.

From the issuer’s perspective, this strategy is cheaper to execute, he added.

“Investors who don’t see high levels of volatility going on for too long can take advantage of the better pricing,” he said.

Portfolio tool

Beals said the notes could find several applications.

“It can be used in a portfolio as a decent hedge. If the market performs well and goes above 20%, the rest of the portfolio will also do well. On the downside, you get a good entry. A market already down 20% is less likely to drop another 20%, at least that’s the hope.

“The structure allows you to hedge; it takes advantage of timing; it has a bearish bias, which is fine in this market environment and the entry point is right.

“I like it,” he said.

Missing the rebound

A market participant had a more negative opinion on the note.

“It’s interesting, but I’m not sure I like the risk-reward. The 5.75% return is fair. But since we’re already in a bear market, the likelihood of being up 20% in two years is quite high,” he said.

“We may not have seen the bottom, but on the upside, I wouldn’t want a cap of 5.75%, not even a cap of 20%.”

The principal-protection feature is always appealing, he noted, but investors pay a high price for it.

“There’s no return enhancement, no leverage, no digital payout. It’s just one to one.

“I’m not sure who would be interested in that except someone who believes we’ll trade in that -20% to +20% range in the next two years.

“It’s hard to imagine we won’t go over 20% on the upside. I’m more concerned about breaching the upper barrier than the lower one since we’re already down 21%,” he said.

“If the range was a little wider, like 30% up, 30% down, I would be more excited about it.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on Friday.

The Cusip number is 17330P4C0.

The fee is 2%.

© 2015 Prospect News.
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