Citigroup’s three-year trigger gears tied to Euro Stoxx 50 to offer ‘attractive’ terms

By Emma Trincal

New York, Feb. 26 – Citigroup Global Markets Holdings Inc.’s 0% trigger gears due Feb. 26, 2021 linked to the Euro Stoxx 50 index offer an attractive structure both on the upside and the downside, financial advisers said.

If the index finishes above its initial level, the payout at maturity will be par plus 2.35 to 2.45 times the gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or falls by up to 25%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline.

“This is an attractive note,” said Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management.

The creditworthiness of the issuer is “very solid,” he said.

The underwriting fee will not exceed 1%, according to the prospectus.

“I would have to see what the final amount is. But even 1% is “not outrageous,” he added.

Finally the Euro Stoxx 50 is a “fairly diversified” index, which is another benefit to investors, he noted.

Reasonable hurdles

Foldes did not see the length of the deal and the non-payment of dividends as major hurdles compared to other deals he saw before.

This adviser tends to use notes with a maturity shorter than two years.

“Three years is a little bit on the longer side, but it’s not unacceptable. We would prefer a shorter note, but the tenor is fine,” he said.

As with any other structured notes, investors do not receive dividend payments. But the dividend yield of 2.25% is not as high as it used to be for this benchmark.

“We recognize that we’re going to lose 2.25% per year of dividend but we do like a lot the leverage. 2.35 x is very significant. I haven’t seen this kind of leverage recently,” he said.

Upside

The leverage amount was the first feature that caught Foldes’ attention. Another one just as advantageous was the uncapped upside while maintaining a protection.

“We find it pretty exceptional to have this type of leverage uncapped with a 75% barrier,” he said.

Barrier

One aspect of the deal Foldes would consider changing however would be the type of protection.

“Having a 25% is very good. But do we need that much?”

Foldes does not like to pay for a protection he feels will not be used. Instead, he would rather get more upside.

“If it was a five-year it would clearly be unnecessary. On a two year, it would be nice. The three-year is some sort of gray area,” he said.

Switching to a buffer

Instead of a 75% barrier, Foldes would seek to obtain a 10% to 15% buffer over the same period of time.

“If things were really bad you would get an absolute protection. The barrier gives you more in size but is contingent. If you breach you would have a big loss since you’re going back to the initial price.”

Overall, Foldes said that the note was the kind of product we would typically “follow up” with the issuer to see how the structure could be incorporated into his portfolio.

“This note caught our attention and we would try to customize it,” he said.

Availability

Carl Kunhardt, wealth adviser with Quest Capital Management, was also very impressed by the product.

“It’s a very attractive note,” he said.

“Three years long is enough to get the full cycle, and it’s not too long. It’s a stable index...it really is like our Dow [Jones industrial average]. I’ll always be allocated to Europe, market up or down.”

The leverage amount was also appreciated.

“2.4. Call it 2.5 with no cap. And a 25% barrier.

“I don’t see anything about the note not to like,” he said.

Even the 1% fee was compelling.

“It’s incredible,” he said.

“My only concern is that it may not be available outside of the distribution channel,” he said.

UBS Financial Services Inc. and Citigroup Global Markets Inc. are the agents.

Citigroup Inc. will be the guarantor.

The notes will settle on Wednesday.

The Cusip number is 17326E217.

© 2015 Prospect News.
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