Citigroup’s $6 million bearish autocalls on banking ETF show unusual premium threshold

By Emma Trincal

New York, July 22 – Citigroup Global Markets Holdings Inc.’s $6 million of 0% bearish autocallable securities due July 27, 2021 linked to the SPDR S&P Regional Banking ETF made for an interesting product, sources said. They pointed to not just the inverse return but also to the rare choice of a sector fund as the reference asset as well as to the strike level for the call.

The notes will be called automatically at par plus a premium on any quarterly valuation date after six months if the ETF closes at or below 90% of its initial level on the related review date, according to a 424B2 filing with the Securities and Exchange Commission.

The premium will be 16.75% on Jan. 15, 2021, 25.125% on April 15, 2021 and 33.5% on July 22, 2021.

If the notes are not called and the final level of the ETF is less than or equal to 90% of its initial level, the payout at maturity will be par plus the premium applicable to the final valuation date.

If the ETF finishes above 90% of its initial level but is less than or equal to the trigger value, 110% of the initial level, the payout will be par.

Otherwise, investors will lose 1% for every 1% increase of the ETF.

Not another S&P bear note

This type of autocall is known as a “snowball.” Instead of a coupon, investors receive a call premium paid upon the call. The premium has a “memory,” which means that missed call premium can be repaid later when the notes get called on a different observation date.

Most bearish deals are growth products. The use of autocalls with inverse exposure is recent, according to data compiled by Prospect News. Another unusual feature is the sector exposure. Typically, bearish notes regardless of the structure type are linked to the S&P 500 index, according to the data.

But a market participant said the negative sector bet did not surprise him.

“We’ve seen this ETF a lot more lately. I don’t think it’s related to earnings even though banks led the way last week when they reported,” he said.

“I think it’s more of a reflection of the outlook some investors may have on this sector.”

Small banks, big stress

In his view, the bearish case on regional banks is relatively sound.

Lower rates and loan defaults as the pandemic hit especially hard small businesses is having a negative impact on regional banks, he said.

“People are concerned about smaller banks having a harder time competing with the big banks. It’s more traditional banking like home financing and business lending. These are lines of business that don’t do well in a recession.”

Another soft spot was the sector’s slower pace to make technology progresses and move to digital banking, which put them at a disadvantage compared to big banks, he added.

“During a pandemic-induced shutdown, when you have to stay at home, if your local bank doesn’t offer the app that allows you to pay your bills online or transfer funds, you may switch to a bigger bank,” he said.

This market participant did not disclose his own view on the sector. But the notes allowed investors to express a negative outlook, he said.

“Anyone who is bearish on regional banks or has a long exposure to them could find this type of structure pretty compelling,” he said.

“The notes pay an attractive premium. Looks like banks are going to cut dividends. With this you can lock in a better rate.

“This note is not for everyone because not everyone is bearish on regional banks.

“But if that’s your view, this is a great way to implement it.”

Not flat

It would be hard to find the equivalent snowball paying such a high call premium even if linked to the same ETF, said an industry source.

But the structure of the notes offered an explanation.

“The call premium is high, but the numbers seem realistic to me. 16.75% after six months is really good. “But keep in mind that you have to be down 10% to make it. If you were short, you would already have made 10%,” this source said.

“You can see this trade as flipping the typical autocall upside down. But here’s the thing... With an autocall you make money if the index is up or flat. It doesn’t have to go anywhere although it can’t do down.

“Here it’s a bit harder. Unless the index is down at least 10% you won’t get called. So, unlike the typical autocall, the market here has to move.

“That’s why the premium is high. And I think it’s reasonable.”

The 110% barrier on the upside was also the “flip side,” he said.

“If you’re up more than 10%, the barrier is breached, and you get the inverse return. You lose money. This is no different from having a downside barrier. I think 110% is fair,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes priced on July 15 and settled on July 20.

The Cusip number is 17328W3D8.

The fee is 1.5%.

© 2015 Prospect News.
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