Citi’s autocalls on Nasdaq offer principal-protection, unlimited upside over five years

By Emma Trincal

New York, Sept. 26 – Citigroup Global Markets Holdings Inc.’s 0% autocallable market-linked securities due Sept. 28, 2028 linked to the Nasdaq-100 index eliminate the risk of losing money due to the market while offering a possible call premium or unlimited upside at maturity. Despite those terms, one adviser objected to the underlying; another was uncomfortable with the tenor.

The securities will be automatically called at par plus a premium of 9.25% to 10% if the index closes at or above its initial level on Sept. 25, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

The exact premium amount was not known at press time.

If the securities have not been called, the payout at maturity will be par plus any index gain. If the index finishes flat or falls, the payout will be par.

Opportunity cost

Given the principal-protection, the only risk is to end up with no gain at the end of the five years, said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group. But such risk was relative.

“There’s definitely an opportunity cost. But if you allocate to the Nasdaq, you have the same risk anyway,” he said.

Chisholm was intrigued by the structure.

“Getting possibly 10% in one year with zero downside risk... I don’t know how they do that. It’s not as if the Nasdaq was a high-yielding index. So, yes, you have the illiquidity for five years, but it’s still a very good note.

“At maturity you have full upside exposure and no risk on the downside. I sort of like it,” he said.

The notes would be a good substitute for the Nasdaq-100 assuming one allocates to the tech-heavy index.

But Chisholm said he doesn’t.

No Nasdaq exposure

“I’m not putting money in the Nasdaq. I’d rather buy Treasuries giving me a 5.5% return,” he said.

The Nasdaq-100 index is an “overly concentrated index,” he said. Its top seven holdings – Apple Inc., Microsoft Corp., Amazon.com Inc., Nvidia Corp., Meta Platforms Inc., Tesla Inc. and Alphabet Inc. – have a combined weighting of more than 43% of the index.

“You’re tied up to those extremely overvalued stocks. The rest of the index is not overvalued but they haven’t been doing well,” he said.

Interest rates

Chisholm brought up another reason to be cautious about the underlying index.

“I also think interest rates are going to stay high longer than most people think. The market doesn’t want to hear that even if Powell is saying it,” he said.

“As long as rates are high, the upside for the Nasdaq is limited.”

Technology stocks have longer-term earnings. Therefore, the current value of projected earnings drops when discounted at a higher interest rate.

“I’m perfectly happy sitting on Treasuries, staying liquid until market valuations become realistic,” he added.

Better alternative

But if Chisholm did not like the underlying index, he found the structure of the notes compelling.

“If I had an allocation to the Nasdaq, I would use this note as a replacement. I like the risk-reward of the note,” he said.

He said that having a note eliminating market risk exposure and giving investors the potential of earning a 10% return after one year was attractive.

“The note is much better than investing in the index outright,” he said.

The relative lack of liquidity and the potential opportunity cost at maturity were not worse than having an allocation to this asset class in the portfolio, he said.

“The note would be a better substitute.”

Sensible pricing

Jonathan Tiemann, president of Tiemann Investment Advisors, said the pricing was “interesting.” However, the long tenor was a drawback.

“You lose the dividends but with the Nasdaq, it’s not a big deal,” he said.

The Nasdaq’s dividend yield is below 1%.

“I suppose with rates being as high as they are, the discount they get on the zero-coupon gives them enough funding for the options,” he said. “This kind of deal would not have flown two years ago. The pricing really relies on high interest rates. It’s not a criticism at all. It’s a sensible adaptation to the market conditions.”

Too long

But Tiemann was not comfortable with the tenor.

“Five years is a long time to have your money tied up if you ask me. There is a call in one year, but you can’t rely on it. You may or may not get called,” he said.

“The illiquidity is my main issue. I don’t worry too much about the credit although a lot could happen in five years. But Citi is not a real concern. The real concern is to be holding the notes for so long.”

Skittish profile

The idea that investors will not lose money due to market conditions makes for a “good pitch,” he added.

But the “pitch” would not convince him to buy the securities.

“You have to take into account all the risks. What if for instance the Nasdaq is up much higher than your premium? That’s one risk on the upside. And what if after five years you get no return, just your money back?

“My sense is this is for someone who doesn’t really understand risk or perhaps I should say: it’s for a very risk-averse investor, someone overly skittish.

“It would be much more interesting if the note was shorter. I just don’t like this five-year tenor.,” he said.

The securities are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes were expected to price on Sept. 25 and to settle on Sept. 28.

The Cusip number is 17291QD27.

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