Advisers compare JPMorgan’s and Citigroup’s $40.22 million leveraged buffered deals on S&P 500

By Emma Trincal

New York, June 30 – UBS recently priced two $40.22 million of S&P 500 index-linked note offerings on the behalf of Citigroup Global Markets Holdings Inc. and JPMorgan Chase Financial Co. LLC. The notes gave investors the choice between 3x and 1.5x leverage leading to different caps and buffer amounts. The structure with the greatest leverage multiple came out with less downside protection and a slightly lower cap. Both notes mature on June 27, 2024 and priced on the same day.

Two deals, same size

With the Citigroup Global Markets Holdings offering, investors get par plus 3 times the index return, subject to a 29.5% cap. This cap is the equivalent of a 13.8% annualized compounded return.

On the downside, investors will receive par if the index falls by up to 15% and will lose 1.1765% for each 1% that the index may decline beyond 15%.

With the JPMorgan Chase Financial offering, the payout at maturity will be par plus 1.5 times the index return, subject to a maximum gain of 32%, or 14.9% per year on a compounded basis. Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% that the index may decline beyond 20%.

1.5x preferred

“I don’t know where we’re going to be in two years, so I think I would go with the JPMorgan one. It has less leverage, but leverage doesn’t always work to your advantage. The strong point here is the 20% buffer,” said Steve Doucette, financial adviser at Proctor Financial.

“Both have a geared buffer, and to me the gearing is inconsequential. So, it doesn’t matter.

“The difference in the caps is not very substantial. By taking the 1.5x leverage, I’m catching an extra percentage point per year. That’s good but that’s not a big deal.”

Downside, upside risks

The risk to the downside over two years was the main concern.

“We’re already down 21%. People talk about good entry points. But the market is down almost every day. We don’t know for how long and how much more. You can always hope that the bear market will be as short as it was in 2020. But that was a rarity. You only have two years to recoup a big drawdown. I’m not saying the market is not going to recover quickly, but who knows? It would have to react strongly to positive news like it did two years ago. The situation is a little different today,” he said.

Another aspect of the comparison is the “upside risk.” How do the caps impact investors if the market was to surge during a quick recovery?

“We could be missing out on some of the upside on the rebound.

“If you ask me, I’d go with a three-year, no cap,” he said.

Moderate view

Jeff Pietsch, founder of Capital Advisors 360, compared the two deals from the perspective of a “moderate investor.”

“At this stage I would consider the Citi one with the 3x. We already had a significant drawdown in the market,” he said.

He examined three possibilities.

“Looking at two years out, we could be up, flat or down modestly.”

The assumption of a low decline after two years was based on the current pullback, which in the mind of a mildly bullish investor limits the odds of more “pain” to come, he explained.

“If I have a modest outlook, I’m going to take the 3x levered on the possibility of having lower returns over two years.

“If the market is down moderately, I’m OK with the 15% buffer.

“If I get the cap because the market is up, that’s fine,” he said.

60/40 alternative

Investors with a moderate view on the market may consider the 3x levered note as an alternative to holding the traditional blend of stocks and bonds, he explained.

“Those investors may not be seeking full participation necessarily. They may only get 60% to 70% to put numbers on it,” he said.

“The cap is reasonable. The 20% buffer is also reasonable. The 3x levered note is the one that best addresses the three possible scenarios – up, flat or down.”

Citigroup Global Markets Inc. and UBS Financial Services Inc. are the agents for the Citigroup deal. The guarantor is Citigroup Inc.

The Cusip number is 17330N229.

J.P. Morgan Securities LLC and UBS Financial Services Inc. are the agents for the JPMorgan offering.

JPMorgan Chase & Co. is the guarantor.

The Cusip number is 48133E132.

The fee is 0% on both deals. Both offerings priced on June 23 and settled on Tuesday.

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