Citigroup's two-year PLUS tied to WisdomTree India target moderate bulls with 5x leverage

By Emma Trincal

New York, Feb. 10 - Citigroup Funding Inc.'s upcoming 0% Performance Leveraged Upside Securities due February 2013 linked to the WisdomTree India Earnings Fund received attention from market participants for its five times leverage factor.

But for some, the highly leveraged structure was not enough of a bonus to offset the absence of downside protection and justify the cap.

The payout at maturity will be par of $10.00 plus five times any increase in the fund's share price, subject to a maximum payout of $12.88 to $13.08 per note that will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will be exposed to any decline in the fund's share price.

High leverage

"I've not seen five times leverage before," said Matt Medeiros, president and chief executive officer of the Institute for Wealth Management.

"What strikes me is the ability to lever up the upside of an asset class you expect to do pretty well without having the leverage on the downside since you're one-for-one on the downside," he said.

Moderate growth

As stated in the prospectus, the notes are designed to "enhance returns and potentially outperform the underlying shares in a moderately bullish scenario."

"Somebody's got to be bullish to get in this but not too bullish," said Steve Doucette, financial adviser at Proctor Financial.

"This is an interesting opportunity for investors that are bullish on India. If you expect moderate growth in India, you can lever up your gains," said Medeiros.

Based on the leverage factor and assuming a 30% cap, investors would maximize their returns if the underlying exchange-traded fund was up 6% for the two years, or 3% per year.

Infrastructure bet

For Medeiros, the underlying fund used in the notes is likely to show less volatility than other Indian equity funds.

"It's a pretty interesting play for someone who believes India is growing, especially in the infrastructure sector. Infrastructure is a less volatile bet than other sectors, such as consumer services, technology and telecommunications for instance," he said.

Volatile underlying

However, the underlying ETF shares have been historically volatile, the prospectus warned in its risk section.

The share price is down nearly 17% in the year to date but up 6% over the past 12 months.

For some, the existence of a cap with a relatively volatile underlying posed a problem.

"I'm not a fan of a relatively low cap while you have an unlimited downside," said Jakob Bronebakk, partner at Jubilee Financial Products.

"If you look at India, it can be up 50% or down 50% in a year or two. So I think 30% becomes a little bit asymmetrical."

"Five times leverage is pretty amazing. But I just hate the cap, especially if there's no protection," said Doucette. "With a different underlying, the cap would be reasonable. But because emerging markets are so volatile, you're locking yourself up to the end point of the two years. It could go all the way up or down."

Medeiros, however, said that "not having downside protection in this particular instrument is OK" because the underlying fund offers enough liquidity. "You should be able to get an attractive bid/ask spread and get out of it if you want to get out prior to maturity."

The fund's market capitalization is $1.38 billion.

The notes (Cusip: 17316G388) will price and settle in February.

Citigroup Global Markets Inc. is the underwriter.

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