Risks outweigh benefits, advisers say about Citigroup’s trigger PLUS on MSCI Europe index

By Emma Trincal

New York, April 25 – Citigroup Global Markets Holdings Inc.’s 0% trigger PLUS due April 24, 2026 linked to the MSCI Europe index offer structural advantages and a diversified underlying, but advisers said they would not consider investing in the product given current risks in both equity and credit markets.

If the index return is positive, the payout at maturity will be par plus 159% of the index return, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index return is negative but ends at or above the 85% trigger level and will lose 1% for every 1% decline if it ends below the trigger level.

Value

Despite finding value in the underlying asset class, Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said he would not invest in the notes due to the current uncertain environment.

“Europe is in a much better place than the U.S. There are some opportunities there although I’m not sure Europe demographics are signaling a lot of future growth. Europe is a stagnant economy. But it also has much better stock valuations than the U.S.,” he said.

“If you’re looking for value, Europe is a much better bet than the U.S.”

Three-year tenor

Having the uncapped leveraged exposure was one of the positive aspects of the structure. But it was not sufficient to warrant a bid on the notes.

“I like the no-cap. But I don’t like the three-year term,” he said.

“Inflation is not under control, and with the interest rates volatility that prevails everywhere it’s very hard to have a view in this market. We’re not in a trending environment. We’re in a volatile environment. Things can go up or down any time.”

Chisholm as a result would prefer a shorter maturity.

“It would give me more visibility,” he said.

The downside protection was not sufficient, he added.

“The 85% barrier is borderline risky. I don’t like barriers in general. I want buffers,” he said.

Tradeoff

Jonathan Tiemann, president of Tiemann Investment Advisors, saw in the notes an alternative to a direct investment in the index.

“There are many good features in this note, the no-cap, the leverage, the barrier,” he said.

“In every scenario, you’re either better off or on par with the index.

“If it’s up, you outperform with the leveraged and unlimited return. If it’s down, you get the protection unless you breach the barrier, in which case, you’re not worse off than being long the position.

“I guess they can price some of it due to high interest rates. Now time value is worth something,” he said.

But there was also a tradeoff, which investors had to feel comfortable with.

“For the most part, you pay for the goodies by giving up the dividends and the liquidity,” he said.

The MSCI Europe index has a 2.75% dividend yield.

“It’s a bullish investment because you need to see growth in order to offset the loss of dividends,” he said.

If the price index finished approximately 15% higher, the non-payment of dividends would be offset by the 1.59x leverage, he said.

“The leverage compensates for the loss of dividends but that’s only if you get a minimum amount of growth. You have to be very bullish because making up for the dividends is one thing, but generating gains is another.”

Broader diversification

Tiemann noted that the use of the MSCI Europe index was far less common than that of the Euro Stoxx 50 index.

“It’s a much better diversified index than the Euro Stoxx 50, not only because it has more holdings and more countries but also because the market capitalization includes not just large-caps but also small and mid-caps,” he said.

The MSCI Europe index has more than 1,000 holdings compared to 50 for the Euro Stoxx index.

Non-euro zone members represent over 45% of the index, such as the United Kingdom with a 23% weighting, Switzerland, Sweden and Norway.

“It gives you a much broader exposure to the European stock market,” he said.

Since the beginning of the year, only one offering linked to the MSCI Europe index as sole underlier has priced, according to data compiled by Prospect News. It was Morgan Stanley Finance LLC’s $6.52 million notes due July 3, 2026, which offered uncapped one-to-one upside participation with full downside protection. The notes priced on Jan. 31.

In comparison, 90 deals tied to the Euro Stoxx 50 index alone have been priced so far this year for a total of $448 million.

Long is better

Despite those attractive factors, Tiemann would not consider the notes.

“It’s an alternative to the index but I would still prefer the index,” he said.

“For one thing, I like having liquidity.

“But also, I would be reluctant to get credit risk exposure at a time when the banking sector is still at risk. I’m not saying that Citigroup is a bad credit. But I don’t want to add another risk to my investment, not in this dicey environment.

“Liquidity risk and credit risk reinforce each other. So even if this is not a bad note, I would still prefer to buy the index fund outright.”

The notes are guaranteed by Citigroup Inc.

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

The notes were expected to price on April 21 and to settle on April 26.

The Cusip number is 17331HSN7.

© 2015 Prospect News.
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