Citi’s $10 million autocalls on S&P 500 ETF offer high coupon with buffer instead of barrier

By Emma Trincal

New York, Nov. 16 – Citigroup Global Markets Holdings Inc.’s $10 million of contingent income autocallable securities due Nov. 10, 2023 linked to the SPDR S&P 500 ETF Trust offer unusual characteristics such as double-digit coupon with memory, short-tenor and buffered protection on the downside.

The notes will pay a contingent monthly coupon at an annual rate of 15.75% if the ETF closes at or above the 90% downside threshold on the corresponding determination date, according to a 424B2 filing with the Securities and Exchange Commission. Previously unpaid coupons, if any, will be automatically included whenever a coupon is paid.

The notes will be called at par plus the contingent coupon if the ETF closes at or above its initial level on any monthly determination date.

The payout at maturity will be par plus the final coupon unless the ETF finishes below its 90% downside threshold, in which case investors will lose 1.11111% for every 1% decline beyond 10%.

No barrier but a buffer

“Obviously, a coupon rate of almost 16% is very attractive. You’re also getting a good downside protection,” said Gib Dunham, chief investment officer at Bridgeway Wealth Partners.

“A lot has changed this year. Volatility and interest rates are much higher. Four or five years ago, you couldn’t see these kinds of products. Rates were so low. Structured products didn’t make a lot of sense.”

Dunham said he liked the buffer, which is less often seen than barriers with income notes.

“I prefer a buffer because you have the certainty of getting protection for a certain amount.”

The hard protection was lower than the typical contingent protection, however.

“When the market is down, it’s down more than 10%. People can live with a 10% loss. They just don’t want a 40% loss,” he said.

Whether this buffer will appeal to investors depends on their view of the market, he added.

“It also depends on how it’s allocated. If it’s in your risk bucket, it’s fine. If it’s in your income bucket, then it’s a mistake.

“I wouldn’t buy it as a bond replacement. I would buy it as equity replacement,” he said.

Finally, investors with a very bullish outlook may be disappointed by the payout.

“You also have to consider the upside. While 15.75% is a very high coupon, if the market does go up a lot, it’s also going to be a cap. You should be comfortable with that,” he said.

No no-call

A market participant examined the consequences of the lack of any call protection.

“This is for someone who wants to play the market recovery, who thinks we turned the corner. But they also want some downside protection,” he said.

“You can be called after one month with a 1.3% return just because the market is not down. 1.3% is not bad though. It’s better than what you’re getting in fixed-income.”

The possibility of a call being triggered as soon as the end of the first month came with some benefits.

“It helps bring the coupon rate higher because it decreases the chances of having a one-year worth of income,” he said.

One caveat was the fee.

“It’s only a 0.2% fee but still. You don’t want to get called too early, at least if it’s a brokerage account. For a fee-based advisory account though, it’s fine.”

The gearing applied to the buffer was also a way to enhance returns.

“Just like the risk of getting called too soon, the geared buffer helps the coupon a lot since you could lose your entire principal,” he said.

“So, if you’re concerned about a major move on the downside, this note is not for you.”

Barrier preferred

Matt Rosenberg, director at Halo Investing, found the size of the protection more relevant than its nature.

“The 10% buffer is fine but it’s not as deep as a barrier. Whether it’s sufficient or not depends on your market outlook,” he said.

“Personally, I prefer a deep barrier. The market right now is very volatile. It can make big moves, up or down.

“I’m not sure how much 10% is going to be an incentive.

“That said, the memory coupon makes up for it. It helps.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter. Morgan Stanley Wealth Management is a selected dealer.

The notes settled on Nov. 10.

The Cusip number is 17330YFR6.

The fee is 0.2%.

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