Citigroup’s $5.56 million autocall trigger PLUS on Euro Stoxx Banks enhance leverage terms

By Emma Trincal

New York, March 15 – Citigroup Inc.’s $5.56 million of 0% autocallable trigger Performance Leveraged Upside Securities due Sept. 13, 2018 linked to the Euro Stoxx Banks index give investors uncapped leveraged return with a 70% barrier at maturity over a short investment horizon, but that is if the notes mature. After six months, the notes may be automatically called, giving investors a set call premium rather than the unlimited and leveraged upside participation, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus a premium of 9.5% if the index closes at or above the initial index level on the interim valuation date of Sept. 11, 2017, according to the prospectus.

If the index finishes above its initial level, the payout at maturity will be par of $10 plus 150% of the gain.

If the index falls but finishes at or above the 70% trigger level, the payout will be par.

Morgan Stanley

The notes are one of Morgan Stanley’s top products, which the agent sells under the label “Autocallable Trigger PLUS.” Morgan Stanley has also priced similar deals for other issuers including Royal Bank of Canada, Barclays and JPMorgan.

Most autocallables are designed for income, sources noted. Usually the notes provide a contingent coupon at a barrier level below the call trigger situated at the initial price. As long as the notes are not called, investors continue to collect the contingent coupon.

“This is a little bit different. It’s interesting,” a market participant said.

Hybrid

It is unusual to see the automatic call feature associated with a leveraged return note, said Tom May, partner at Catley Lakeman Securities.

“It’s a bit of a hybrid,” he noted.

“There’s only one call. If you don’t call, you’re long the market.

“In six months, if the market is lower, you have to make up for it in order to get a positive return at maturity.

“Assume the index is down 10% in September, you’re already 10% away from today’s level and you need the market to recover in order to get a positive return.”

He said the benefit of the structure was to lower the cost of the options.

“We’ve done it before. But I’m not a big fan of it. It’s cheaper because if you don’t get called, you’re already at an out-of-the-money level.”

The mixed nature of the product made it its positioning in a portfolio more difficult.

“Do you allocate it as insurance, like a defensive autocall or as a market type of trade?” he said.

“It’s hard to tell. Somehow it flips.

“If you want to be long the market, buy the leverage. If you don’t, just buy the autocall. Don’t mix them together.

“It’s just my opinion, but I’d rather do one thing or the other.”

Better terms

The inclusion of an autocall prior to the final leveraged payout was a way for the issuer to provide better terms over a short period of time, the market participant noted.

“What makes it cheaper is that call,” the market participant said.

“If there was no autocall in September, you probably would not be able to offer 1.5 times the upside with no cap and a 70% barrier on the downside, especially on such a short maturity.

“You’d have to have some kind of cap.

“This call cheapens the structure and allows the issuer to give you better economics.”

Investors, if they’re bullish, would probably prefer to reach maturity, he explained.

“You hope you get passed the call so you can get the benefits of the 1.5 times unlimited upside at maturity.”

Both the autocall scenario and the positive return at maturity were favorable outcomes for investors depending on the market conditions.

Upside risk

“If the market is up slightly, you get called. It’s not the end of the world. You get 4.25% in six months,” he said.

“If you don’t get called and the market is up, you can get a pretty good return with the leverage and no cap.”

The main risk is to be called if the market rallies.

“If there’s a strong bull market, your call premium is your cap and you run the risk of missing the upside.

“This autocall piece of the structure is your main risk. Is it too much to take the risk of capping your upside if you’re bullish? That’s a decision investors have to make.”

For this market participant, the call feature did not define the structure.

“It’s a leveraged note with contingent downside, but it’s built with an autocall along the way,” he said.

“To me, it’s a leveraged note with a little twist.

“They use the autocall to cheapen it.

“As an investor, you have to decide if you’re willing to get called and see your return limited to the premium. Most people would prefer the leverage. You’re giving up the certainty of having the leverage, but you’re getting much better terms for it.”

Citigroup Global Markets Inc. was the underwriter with Morgan Stanley Wealth Management handling distribution.

The notes (Cusip: 17325E655) priced on March 10.

The fee was 2%.

© 2015 Prospect News.
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