Citi’s $10 million 15.1% contingent income autocalls on Biotech ETF offer memory, buffer

By Emma Trincal

New York, Sept. 8 – Citigroup Global Markets Holdings Inc.’s $10 million of contingent income autocallable securities due Sept. 10, 2024 linked to the SPDR S&P Biotech exchange-traded fund give investors a generous coupon along with a buffer and memory as defensive features, said a contrarian investor.

Investors will receive a coupon of 15.1% per annum, paid monthly, if the underlying fund closes at or above its 85% downside threshold on the related monthly observation date, plus any previously unpaid coupons, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically at par if the price of the underlying ETF is greater than or equal to its initial price on any monthly review date, starting Oct. 5.

At maturity the payout will be par unless the ETF declines by more than its 15% buffer, in which case investors will lose 1.1765% for every 1% that the ETF declines beyond 15%.

Double bottom

“The coupon seems reasonable,” said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

The protection, however, was not bullet proof.

“It’s nice to have a buffer, but we could breach that level. If we go back to the lows of May and June 2022, we would be more than 15% below the current price,” he said.

The notes priced at an initial level of $81.07, setting the coupon barrier and buffer threshold at $68.96.

The ETF last year posted a double dip in May and June at $61.78 and $62.13.

“Anytime you’re below the $68.96 level you won’t get your coupon and you also face the risk of potentially losing money at maturity,” he said.

“So, you could get back to the lows of the spring of 2022 and miss some coupons. At the same time, you’re entering this trade at fairly valued levels.”

Three years ago, the ETF hit an all-time high of approximately $115.

“The question really is: what are the chances that we’re going to get back to those lows of last year? It could go either way. But you’re likely to collect a few coupons down the road. Even more likely: you could get called away above initial price.”

If called after one month, investors would pocket a 1.26% gain, he noted.

Good memory

Another factor playing to the advantage of noteholders is the memory feature.

“You should get a few monthly coupons and if you miss some, you can catch up later,” he said.

Even if the ETF drops more than 15% at maturity, investors will benefit from two features, he added.

First the buffer will reduce losses even with the gearing.

Second, the memory may give investors a chance to finish with a gain.

“If you collect a lot of coupons, you could come ahead. The amount of losses may be less than the amount of collected coupons,” he said.

Small caps

Another advantage offered by the underlying was its relatively low correlation with the S&P 500 index.

“This ETF holds a great number of small companies. Many of those stocks are in the Russell 2000. That’s a very good thing because the Russell is not as richly valued as the S&P and the Nasdaq,” he noted.

“That said, you could still fall below the 15% level a year from now. But you are closer to fair value than the S&P. And your total net loss is not going to be more than a few percentage points given the double layer of protection you’re getting from the buffer and the collected coupons.”

Pre-Elections

Kaplan said a bear market is already underway. The S&P 500 index posted a recent high at the end of July, but such level remains below the January 2022 peak.

However, Kaplan predicted that the bear market would unfold slowly, a positive factor for the short-dated note.

The September 2024 maturity date ahead of the November Presidential Elections could benefit investors, he said.

“I think this timing gives you a better chance to come ahead. We’ll probably have some volatility ahead of the Elections. But the market is not likely to collapse at that time. I expect the biggest drop after the Elections,” he said.

He pointed to the precedent of 2008.

The “biggest percentage drop” happened just after the November Elections.

“Given the speculative bubble we’re in, it’s going to take some time for the market to hit bottom. I don’t see it until 2025,” he said.

Low concentration

The underlying itself provided some benefits.

Kaplan said that the SPDR S&P Biotech ETF showed less concentration risk than some of its competitors, citing the iShares Biotechnology ETF and the VanEck Biotech ETF.

“When I was buying, I picked this fund rather than these two others because the top names had very small weightings,” he said.

Indeed, Amgen Inc., which is the top holding for both the iShares Biotechnology and the VanEck Biotech, makes for 9.28% and 13.38% of these funds, respectively.

In contrast, Bridgebio Pharma Inc., which is the top constituent of the SPDR S&P Biotech ETF, has a weighting of only 2.15%.

Wrong season

In conclusion, Kaplan said the structure and underlying offered advantages to investors. But the timing in relation to the valuation was not perfect.

“I like the rate of return, the memory feature and the buffer. I also like the fact that the underlying ETF is made of small companies, which are less overvalued than large cap stocks,” he said.

“But the timing is not ideal. The price is relatively high right now. In the past two years, you had better opportunities to buy than now.”

Kaplan also looked at insiders’ activity for the fund’s holdings.

“Insiders were buying before but not anymore. The price is near fair value. Not overvalued but not cheap. They’re not selling yet.

“I think the timing is off. You don’t go skiing in Central Park in August or September even if you have the best skis and the perfect equipment.

“You should have done that before or you should wait for the appropriate season, otherwise, it’s not going to work out very well,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

Morgan Stanley will act as a dealer.

The notes settled on Friday.

The Cusip number is 17291QFM1.

The fee is 0.1%.

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