Citi’s $550,000 autocalls on S&P 500 reintroduce rarely used lookback feature

By Emma Trincal

New York, Nov. 8 – Citigroup Global Markets Holdings Inc.’s $550,000 of 0% autocallable contingent barrier notes due Jan. 8, 2025 tied to the S&P 500 index showed an unusual structure by assembling a leveraged return/autocallable hybrid product and adding to it a “lookback” feature, which potentially gives investors a lower entry point than the initial price on the strike or trade date. Lookbacks have not been spotted for some time, according to data compiled by Prospect News.

If the index closes at or above the lookback index level on the potential autocall date, Jan. 3, 2024, the notes will be called at par plus a premium of 14.75%, according to a 424B2 filing with the Securities and Exchange Commission.

The lookback index level will be the lowest closing level of the index on any trading day from the strike date to Dec. 14 and will not be higher than the index’s closing level on the strike date.

If the index finishes above its lookback level, the payout at maturity will be par plus 150% of the index return.

If the index declines up to the 75% barrier from its lookback level, investors will receive par. Otherwise, investors will lose 1% for each 1% decline of the index from its lookback level.

Sound structure

Tom Balcom, founder of 1650 Wealth Management, said the notes were attractive.

You have the 1.5x at maturity, no cap and if you get called in 14 months, you receive a 14.75% premium, which is about 1% a month. ... Not too shabby,” he said.

The lookback period, which allowed investors to lock in the lowest closing level from the strike date of Nov. 2 to mid-December, was another advantage.

“I always liked this feature. For some reason, I haven’t seen it in a while,” he said.

If the notes were not called, the protection amount based on the duration was sufficient, he said.

“A 75% barrier in more than two years while we’re already down 20%, I think it’s pretty reasonable,” he said.

FOMO

The main consideration was how clients may react to a call.

“A rip in the market before the call would be the only concern some of my most bullish clients may have since your 14.75% premium is still a cap. Some investors believe the market is going to start recovering very soon and could rally strongly,” he said.

The structure placed the cap a year prior to maturity, which allowed the issuer to price the uncapped leveraged exposure on the upside and the downside barrier over a short duration, he said.

“You’re only capped upon the call. And 14.75% frankly is not a bad cap,” he said.

Some investors however want the unlimited upside and the protection at all times, he said.

“When clients give into FOMO, we always explain that capping the upside is the price to pay for getting the downside protection. If you don’t get called, you get everything. The tradeoff is the one-time call.”

FOMO is a term that refers to investors’ anxiety about not scoring enough gains from the market, or “fear of missing out.”

Bearish case

A financial adviser had a bearish outlook and did not feel comfortable with the payout despite the lookback.

The S&P 500 index has been in a bear market throughout the year, he said, down 20% from its all-time high of Jan. 4.

“In my view there is still a long way to go. Because the bull cycle has been going on for so long, it’s going to take some time for the market to get to a bottom. Will it be during the second half of 2024 or the first half of 2025? We don’t know exactly. But to place the beginning of 2025 as the end point of the notes is particularly unfavorable,” he said.

Dangerous 2025

Moreover, several volatility-inducing factors may play out during that year, he said, increasing the risk associated with the maturity date.

The first one was the inauguration of a newly elected president.

“The notes mature just when a new president will be inaugurated. You’ll definitely have a new president, and if it’s a Republican, you’ll have a party switch. Under those circumstances – new president or party switch or both – the market tends to be depressed,” he said.

Another factor of uncertainty will be the expiration of the tax cuts in 2025, he said.

“If the corporate tax rate goes back to its 2017 level, it may have a negative impact on the economy.”

The current Federal corporate tax rate is 21%. Prior to the Tax Cuts and Jobs Act of 2017, the maximum tax rate was 35%.

Wealth perception

Pushing his bearish case further, this adviser cited the negative wealth effect, which, in his view, has yet to be fully felt.

“People spend more when they feel rich as a result of the rising value of their net worth ... many studies have made that point clear. When the stock market drops, when the value of their portfolio declines, people feel poorer, and they spend less,” he said.

A recession therefore was more of a concern than inflation, he noted.

“Inflation at first was the problem and it has forced the equity bubble to collapse. But as asset prices go down, people spend less, and you then move onto a recessionary cycle which will extend the length of the bear market.”

Lookback, call

This adviser said the lookback was an attractive feature but one unlikely to make a difference for investors.

“We’re not going to get to the bottom of the bear market in 42 days,” he said.

“The S&P is still overvalued. This note would be better if the market had already collapsed. But it hasn’t. You keep on seeing rebounds, which are typical bear market rallies. The market hasn’t capitulated yet.”

This adviser’s main concern was the amount of protection at maturity.

“The notes are likely to mature around the worst time of the bear market. The chances of being down more than 25% at maturity are extremely high,” he said.

Investors may still benefit from the autocall and get a 14.75% return in 14 months.

“It would certainly be a great outcome. Given the fact that we are in a bear market with multiple rebounds ahead of us, it’s always possible. But it’s not likely,” he said.

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter. J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA are the agents.

The notes settled on Tuesday.

The Cusip number is 17330YQL7.

The fee is 1.58%.

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