Citigroup’s enhanced barrier digital notes on Euro Stoxx 50 seen worth giving up dividends

By Emma Trincal

New York, Jan. 2 – Citigroup Global Markets Holdings Inc.’s 0% enhanced barrier digital plus securities due Jan. 30, 2023 linked to the Euro Stoxx 50 index offer enough benefits to make the non-payment of dividends an acceptable trade off, buysiders said.

The notes will be guaranteed by Citigroup Inc., according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above the barrier level, 80% of the initial level, the payout at maturity will be par plus the greater of any gain and the 38% to 42% fixed return. The exact fixed return will be set at pricing.

Otherwise, investors will lose 1% for each 1% decline of the index from its initial level.

Dividends

“You’re getting a 40% minimum return even if the index is down 20%. That’s a major jump,” said Tom Balcom, founder of 1650 Wealth Management.

He assumed a 40% fixed return at midpoint of the pre-pricing range.

Investors will see their performance linked to the price return of the index and must give up dividends, as is the case with most structured notes, he added.

“But it’s worth giving up the dividends in this case because you’re getting a pretty good trade off.”

The Euro Stoxx 50 index yields approximately 2.5%. Investors incur an opportunity cost of approximately 12% over the five-year term, without taking into account compounding, he said.

“But in a range-bound market it’s a nice investment. If the price index is up 20%, you get 40%. That’s more than enough to make up for the loss of dividends,” he said.

Any price increase below 28% over the five-year term would generate alpha over the total return of the index, he said.

Dual directional

The case for the downside in a range-bound market was even more striking.

“If you’re down 20% or less you’ll make 40%. That’s quite nice.

“Yes you’re giving up 12% in dividends. But on the flip side, you have this downside protection with the ability to get a great return.”

This digital note with a trigger set at the barrier level shares with structures that offer an absolute return payout the characteristic of delivering a positive return in a down market, he noted.

But the difference is notable. The absolute return note offers a one-to-one inverse participation to the index decline, which requires a drop to barrier level in order to maximize gains. This note, on the other hand, provides a digital return regardless of the amount of decline as long as the drops stays above 80% and below 100% of the initial price.

Digital enhancement

“You can make plus 40% if the Euro Stoxx is down 5% and plus 40% if it’s down 18%. That way you can really benefit from a range-bound market,” he said.

“You don’t have to get near the barrier to max out.

“I assume that it’s a big advantage over the absolute return note and that perhaps here they may not give you as much protection. Maybe the absolute return would have a lower barrier.”

But the Citi deal offers no cap on the upside and a wide range of return enhancement, he added.

“It’s a very interesting play at this point in time.

“We have clients who want the exposure to the market with no cap. At the same time they want the protection. This one gives you that and more. That’s why I like it,” he said.

Tenor

Donald McCoy, financial adviser at Planners Financial Services, said he also found the structure attractive.

For one thing, the five-year tenor lowers the risk profile of the investment compared to a shorter-dated note.

“Generally the indexes are not going to be down 20% after a five-year period even if we are at elevated levels,” he said.

“If you’re down 40% in this first year – assuming a repeat of 2008 – you still have plenty of time to fight back.”

Wide band

Investors are in a situation comparable to a long-only investment minus dividends when the index is either down by more than 20% or up higher than 40%, he said.

“Within a 60 points range, you outperform.

“They give you that very generous bump. You’re guaranteed at least 8% a year.

“It seems like a very attractive investment for just anybody on your risk level spectrum.

“And because there is no cap on it, even growth and aggressive growth people can see the value of this.

“The only thing you’re giving up would be the dividends, which over five years would be significant.

“But if the market is just muddling through, you’re going to get a boost and come up ahead and you still have that protection along with it.”

Hard to beat

McCoy compared the note with a hypothetical absolute return structure offering the same terms.

“You’re getting twice more the return if you’re at the barrier level with this product. But it’s probably not fair to compare. The absolute return one would probably be shorter than five years and it may not be the same protection size.”

Still, McCoy said that he would be hard-pressed to find another dual directional deal that could “beat” this product especially given the uncapped upside.

Citigroup Global Markets Inc. is the underwriter.

The notes (Cusip: 17324CQ82) will price on Jan. 25 and settle three business days after pricing.

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