Citi reintroduces older structure with $6.66 million variable coupon notes on 10-stock basket

By Emma Trincal

New York, April 27 – Citigroup Global Markets Holdings Inc. in the pricing of $6.66 million of variable coupon market-linked notes due April 21, 2028 tied to a basket of stocks is offering a product which used to be popular a few years ago before the worst-of trend took over, a market participant said.

The basket consists of 10 equally weighted stocks. Those are Abbott Laboratories, Adobe Inc., Alphabet Inc., Amazon.com, Inc., Caterpillar Inc., General Motors Co., Medtronic plc, Rockwell Automation, Inc., salesforce.com, inc. and Walt Disney Co., according to a 424B2 filed with the Securities and Exchange Commission.

The notes will pay an annual coupon at a variable rate based upon the weighted average of the modified underlying returns of each basket component, subject to a 9% cap and a 1% floor.

If a basket component closes at or above its initial level on an annual valuation date, the modified underlying return for that component stock will be 9%.

If a component stock’s return is negative on an annual valuation date, the modified underlying return for that component will reflect the same percentage decline of the stock from its initial level, subject to a floor of negative 10%.

The payout at maturity will be par plus the final variable coupon.

Remake

“I’ve seen those types of notes in the past. It was pretty common. You applied a return formula to each stock in the basket with a floor and a cap,” a sellsider said.

“But it used to be on fewer stocks, maybe four or five. Also, the upside digital was lower, and the floor was also much lower. For instance, you’d have a 5% to 7% cap on the upside and a -30% floor.”

He was referring to the range of modified underlying returns from minus 10% to plus 9% and not to the range of return offered by the coupon, which is from 1% to 9%.

“The way this note is structured is much more interesting, not just because you have more stocks but because there’s only a 1% difference between the floor and the cap. So, it’s kind of fair. A bad stock is not going to have that much of a negative impact,” he said.

Various scenarios

The six-year bullet note pays a variable coupon from 1% to 9% based on the formula defined by the prospectus.

“It’s not a bad range. You also have the principal protection. For a client looking for a fixed-income substitute, it seems like a pretty good deal,” he said.

One caveat, according to this sellsider, was the volatility of some of the basket components.

Based on the assumption that each stock had the potential to hit its respective cap or floor as a result of its volatility, he envisioned a few potential scenarios.

The first one reflected a “moderately bullish” environment.

“The stocks perform well. You have seven stocks up giving you +9% each and three down, which is three times negative 10%. Your variable coupon is 3.3% for that year,” he said.

A more negative scenario would show five stocks with a positive return and five with a negative performance. The formula would lead to a -0.5% return, which become the minimum variable rate of 1%.

High-net worth deal

“Regardless of the basket performance, you can’t get less than 1% a year and your principal is guaranteed at maturity. The underwriting fee is 1% for six years. That’s pretty tight. I think it looks like a pretty good deal,” he said.

“They priced $6.66 million. It’s unlikely to be for one client only unless it’s an institutional one. I guess it’s probably for high-net-worth clients,” he added.

The pricing of a 100% principal-protected income product without the recourse of a worst-of or volatility control underlying index was the sign of a positive development in the market.

“You couldn’t do this in the past but now that rates are higher, issuers are more able to price principal-protected notes. We’ll see more of these types of deals under a variety of different formats,” he said.

Coupon at risk

A market participant said the notes may fit the needs of some investors but to a degree.

“It’s complicated and definitely not for everyone. You’re getting some income and the principal protection, which is good. But an adviser will find it challenging to explain those terms to a client,” he said.

With no market risk exposure, only the coupon is at risk. While investors are guaranteed the payment of at least 1% per year, they still incur the risk of collecting nothing higher than 1% and perhaps over more than just one year, he said.

“The 9% cap is attractive. But you have to take into account the possibility of getting only 1%. There are other ways in today’s environment to get a coupon higher than 1%.

Such income alternatives are unlikely to provide the full downside protection as they come with greater risk, he conceded.

“It definitely offers some opportunities. While we strive to show more straightforward structures it’s still compelling for some clients but only for a specific type of risk-averse client.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on April 21.

The Cusip number is 17330FDL2.

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