Citi’s $1.4 million bearish autocalls on S&P show innovative and risky play, advisers say

By Emma Trincal

New York, Oct. 24 – Citigroup Global Markets Holdings Inc.’s $1.4 million of bearish autocallable contingent coupon securities due Oct. 21, 2024 linked to the performance of the S&P 500 index present an original structure, which inverts the usual terms of a phoenix autocallable note, advisers said.

In this bearish play, for investors to collect the contingent coupon, the underlying has to close below a “positive” rather than above a “negative” barrier as it is normally the case. Similarly, the notes get called when the underlying close below its initial level, not above it.

The Citigroup notes will pay a contingent monthly coupon at an annualized rate of 10.75% if the index’s closing level is less than or equal to the coupon barrier level, 115% of the initial level, on the valuation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus the contingent coupon if the index closes at or below its initial level on any monthly valuation date after three months.

If the notes are not called and the index’s final level is less than or equal to its final barrier level, 115% of initial level, the payout at maturity will be par plus the final coupon.

Otherwise, investors will lose 1% for every 1% that the index finishes above its initial level.

Risky, complex

“There’s a lot of risk in this. At first glance, it looks like a terrible note. But there is an interesting part and that’s the high likelihood of getting your coupon initially and maybe for a few months,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“What are the odds that the S&P would be up more than 15% in the early months? Very unlikely. That’s the good part.

“But the problem is the downside. After a year, the S&P could easily be up 15%. You then have unlimited risk.

Chisholm did not like the risk-adjusted return.

“The 10.75% return is not great given that you could lose 100% of your principal.”

Another problem was the complexity of the payout.

“The notes are too complicated for most clients. There are some interesting parts in this. But the risk and the complexity make it a non-starter.”

Jonathan Tiemann, president of Tiemann Investment Advisors, was surprised by the terms.

“I wonder who would do this. There are very few scenarios where you would end up better off than with the underlying.

“To get the full coupon, the index cannot drop even once from its initial price otherwise you get called. And it has to stay below 15% month after month.

“If after one year the index is up more than 15% you get killed.

“Who wants that kind of payoff schedule?”

Not a hedge

The downside risk at maturity was the main concern.

“It’s not rare for the S&P to be up more than 15% in one year. This note doesn’t hedge anything really.”

For Tiemann, the chances of outperforming the index were limited.

If the price return of the S&P finished up 9.15% for instance, investors would receive the equivalent of the full annualized contingent coupon of the notes. The total return of the index includes the 1.6% dividend yield.

For Tiemann, it was easier to achieve this return via a direct investment in the index fund.

“What are the chances that you would collect your coupon each and every month?

“You’re going to sit there, missing some coupons until maturity and then, you’re probably going to lose money.”

The automatic call was not a redeeming feature.

“If the index is negative, you get called. You might as well put your money in cash or Treasuries.”

For a few coupons

Tiemann said he was struggling to find any reason to invest in the notes.

“I suppose the selling point is that it’s easy to get your coupon when you’re betting on the index staying below 115% for a number of months. But it’s a gamble because it you don’t get called; you are likely to breach that 115% barrier at maturity.

“For a few coupons you’re putting your investment at a high level of risk

“I can’t quite figure out who would want this.

“Personally, I don’t love it.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Oct. 19.

The Cusip number is 17291QW59.

The fee is 1.75%.

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