Citi’s $7.21 million market-linked autocalls on three stocks offer high/low variable coupon

By Emma Trincal

New York, Aug. 24 – Citigroup Global Markets Holdings Inc.’s $7.21 million of autocallable variable coupon market-linked notes due Aug. 20, 2027 tied to the stock performance of Amazon.com, Inc., Apple Inc. and Tesla, Inc. represent, along with a few recent deals, the reintroduction of an old structure known as “high/low” coupon notes.

The notes will pay a monthly coupon at a variable rate, according to a 424B2 filed with the Securities and Exchange Commission.

If each stock closes at or above its 70% coupon barrier on the corresponding review date, the payable coupon will be the equivalent of approximately 7% per year. If any stock closes below its coupon barrier, the equivalent annual rate will be 0.25%.

After one year, the notes will be automatically called at par plus the coupon if each stock closes at or above its initial level on any monthly valuation date.

The payout at maturity will be par plus the relevant coupon.

A few more deals

At the end of July, Citigroup priced the same deal (same terms, tenor and underliers) for $13.6 million. The only difference was the lower coupon rate priced at 0.5% per annum.

At the same time, GS Finance Corp. sold $9.64 million of the same five-year structure similarly tied to Apple, Amazon.com, Inc. and Tesla. The 7% and 0.25% coupons, 70% coupon barrier and principal-protection were identical to Citigroup’s latest deal. Goldman Sachs & Co. LLC was the underwriter.

Those products are not entirely new. Similar deals named in the past “high/low coupon notes” used to be structured either as notes or as market-linked certificates of deposits, according to data compiled by Prospect News.

Tradeoff for safety

“People are seeking different types of principal protection, and they want different types of payoffs,” said Matt Rosenberg, director at Halo Investing.

“As rates continue to climb, we should see more notes like this one combining creative payoffs and principal-protected structures.”

Rosenberg noted that the 0.25% lower coupon was not compelling at first glance.

“They can say that they give you a return regardless of the market and that’s true. But I don’t see much difference between 0.25% and 0%,” he said.

But for some investors losing some of the income was worthwhile for the guarantee of not losing principal in a market downturn, he added.

Double-digit coupon

“The 7% coupon is attractive given that you’re fully protected on the downside. If you take those three stocks and use them in a typical Phoenix autocall with a barrier at maturity, the coupon would obviously jump.”

As an example, JPMorgan Chase Financial Co. LLC issued last week $1.39 million of three-year autocallable notes linked to the least performing of Amazon, Apple and Tesla, according to a 424B2 filing with the SEC.

The annualized contingent coupon was 21.5% payable monthly based on a 70% coupon barrier.

The principal repayment barrier at maturity was set at 50%.

“There is a price to pay for the full principal protection. For some investors, it’s worth accepting a much lower yield,” he said.

Call risk

A financial adviser said the structure was unusual.

“It’s pretty interesting. The barrier only applies to the coupon, and you get full protection on the downside.

“You’re pretty safe with a 30% coupon barrier so you should get your 7% at least for the first year when you can’t get called.

“You’re more likely to get autocalled. I would say you’re mostly dealing with reinvestment risk even if it doesn’t apply on year one,” he said.

The Musk factor

He looked at the three underlying stocks, which are commonly used in income notes.

“Of the three, Tesla has the most idiosyncratic risk. [Tesla’s chief executive] Elon Musk has been selling shares to buy Twitter; then he’s been calling the deal off; now it’s in court.

“Apple is probably the safest of the three.”

This adviser agreed that the 0.25% lower coupon did not add much value.

“You’re guaranteed to earn something...0.25% per year if not 7%.

“But 0.25% is not meaningful especially in a rising rates environment when you can buy U.S. Treasury bills yielding over 3%.

“If the barrier breaches, people may want to start selling at that point. Most people are not going to hold on to a note just to get 0.25% per annum,” he said.

Easier to price

The pricing of equity-linked income notes providing full return of principal was somewhat notable in today’s market even if not entirely new, he noted.

“Rates are up, and the cost of principal-protection is now lower because you have a zero-coupon embedded in the structure, which cheapens the cost of the options,” he said.

“I think we may see more of those types of deals looking forward.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on Monday.

The Cusip number is 17330RE35.

The fee is 3.75%.

© 2015 Prospect News.
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