Citi’s $11.5 million autocalls on S&P offer broad band for outperformance with bearish tilt

By Emma Trincal

New York, Aug. 10 – Citigroup Global Markets Holdings Inc.’s $11.5 million of 0% autocallable enhanced barrier notes due Aug. 7, 2025 linked to the performance of the S&P 500 index give investors a wide potential to outperform the market at maturity but the best outcome is probably on the downside, advisers said.

The notes will be automatically called at par plus a 7.6% call premium if the index closes at or above its initial level on Aug. 14, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above 70% of its initial level, the payout at maturity will be the greater of par plus the index return and par plus 15.2%.

Otherwise, investors will lose 1% for every 1% decline from initial level.

Bearish bias

“Worst case scenario, the market is up 20% after one year, you get kicked out at 7.6%. If you buy this, you’re obviously more bearish than bullish,” said Steve Doucette, financial adviser at Proctor Financial.

The scenario at maturity was the most compelling, he added.

“At the end of the two years you could outperform in a big way. Market at maturity is down 30% you make 15%, that’s a 45% spread.”

It’s in investors’ best interest not to be called after one year, he said, which only happens if the index is negative on that first call date.

“It’s got a bearish bias because you really don’t want to be called. You have to believe that the index won’t be up in a year and that it will be in that 70%-115% range in two years,” he said.

The best potential to outperform the market was at maturity. At that point in time, the note revealed another benefit, which callable notes usually lack: the one-to-one participation in the index return above the 15.2% call premium.

“Your upside is not capped. It’s kind of neat. Your 15% premium is a minimum, not a maximum return. If the index is higher, you capture the market performance. You don’t outperform anymore, but you don’t underperform either. “That’s unusual for an autocall,” he said.

Another reason for buyers of the note to be more bearish than bullish is because the best potential to outperform is on the downside.

“You want the market to be down in one year and to stay down. You get the more bang for your buck when it’s down at the end. Of course, you just can’t burst that barrier.”

Unlimited upside

But the note was not entirely bearish since there was room for excess return on the upside as well, albeit within a narrower range, he added.

“If it’s up, you can still beat the market, but not as much. If you’re up more than 15%, you’re done. Then you’re long the index. At least you’re not capped but you no longer outperform.”

The note was “interesting” in that it may satisfy a broader range of views than most typical autocallable products, he said.

“You can be bearish or slightly bullish. You can have a range-bound view. Those financial engineers let you have a pretty large scale of convictions.”

The potential for “alpha” however was limited to a range between 70% and 115%.

“It may be tied to a range but it’s a pretty broad range even though it’s geared towards the bearish side. There is a chance to outperform on the upside, but it’s much more bearish than bullish.”

This “broad” potential for excess return was what made the note particularly attractive, he said.

Another benefit was the ability for the note to market perform.

“I like that at maturity you’re not capped at the digital level. Again, it’s not your common autocall.”

Doucette’s view on the structure was mixed, however.

“It’s an interesting note. But it’s hard for me to get excited. Yes, you can outperform a lot. But you have to get through that first call and if you don’t, you’re stuck with a pretty lousy 7.6% premium.”

“It’s a good note on the long end. I guess you would have to get rid of that call.”

Income solution

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, also liked the payout at maturity giving investors the greater of the premium and the uncapped index return.

“As long as you don’t breach that 70% barrier, you’ll get a minimum of 15.2%. If the index ends up a lot more than that, you capture the index’ gain.

“That’s not your typical autocall. I’d say it’s pretty unique.”

The note offered a combination of growth and income.

However, investors were more likely to collect the premium than to participate in the upside.

“I would see it as a two-year note, more as an income note than growth,” he said.

“Most likely I’ll get the 15% in two years and that’s cool. Alternatively, I can get a lot more if the index is greater than 15%. It’s a pretty low-risk strategy.

“It just takes a little bit of mental gymnastics to go through it.”

The various “moving parts” of the structure appeared to be the main drawback for this adviser.

Corporate bucket

The relatively complex structure could be a problem, he said.

“Can I explain it to a client? I want to make sure the client knows what it is in case something goes wrong.

“If I can’t explain it, I don’t want to touch it. I tend to be on the simple side.”

Nuttall agreed that the note’s profile showed a bearish tilt. The range of return allowing the note to outperform on the downside was simply twice greater than on the upside, he explained.

“If the index drops above the barrier, you’ll do much better. I tend to think of it more as a bearish play.”

Nuttall said the note was “safer” than many he has seen recently. The autocall and the exposure to a single underlier were some of the factors behind his view. He also liked the downside protection.

“The barrier is fine at that level. I would probably use this note as fixed-income replacement and more specifically as a substitute for a corporate bond.”

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Monday.

The Cusip number is 17291Q2J2.

The fee is 1.5%.

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