Citigroup's jump securities linked to Brent crude oil offer fair structure, risky exposure

By Emma Trincal

New York, Nov. 14 - Citigroup Funding Inc.'s 0% trigger jump securities due Nov. 26, 2014 linked to the price of the Brent blend crude oil futures contract offer a simple and attractive structure to investors who have the risk tolerance and bullishness to bet on oil, financial advisers said.

If the final commodity price is greater than the initial price, the payout at maturity will be par of $1,000 plus the greater of the upside payment, which is expected to be 38% to 42% and will be set at pricing, and the commodity return, according to an FWP filing with the Securities and Exchange Commission.

If the final price is 65% to 100% of the initial price, the payout will be par. If the final price is less than 65% of the initial price, investors will be fully exposed to the decline from the initial price.

Fair enough

"This is a fair note," said Carl Kunhardt, wealth advisor at Quest Capital Management.

"It wouldn't fit into my portfolio because we don't do sector play let alone commodities play. So right off the bat, it wouldn't work for us.

"But it's a fair enough note. There's nothing to be picked at. It's not a complex strategy. Citigroup with this product delivers a very plain vanilla structure. They're not trying to be cute.

"I like investments not to be simple but to be straightforward.

"If you have to sit and explain a single investment to a client for more than five minutes, you have to ask yourself if it's appropriate.

"Those products where they tell you if this percentage happens on the second Tuesday, this and this happens. ... Give me a break!

"Here, you get all the traditional things you expect in a structured product. You can explain it to a client."

Good for bulls

Scott Cramer, president of Cramer & Rauchegger, Inc. said also that the structure of the product is appealing for a particular type of investor.

"This deal looks very clean with a minimum amount of moving parts," he said.

"It's a very good deal for someone who is bullish on the underlying and wants to limit the potential downside.

"It's a good way to capture some of the upside because it doesn't have to go up much.

"If it's below 65% [of the initial] price, I'll be taking the 100% investment risk, which I would have taken anyway.

"The only risk is liquidity risk and credit risk.

"But the 65% barrier is quite good. If I wanted to invest in oil, that's something I would take a serious look at."

Kunhardt said that the structure offsets some of the risk involved in a direct investment in oil futures.

"On a point to point, you're taking some of the volatility out. You only care about what happens between the beginning and the end," said Kunhardt.

"The individual commodity is risk in itself. Here, you're not adding risk. You're hedging your risk."

Volatile underlying

But not everyone is willing to bet on the price of oil over a three-year period.

According to the prospectus, the price of Brent blend crude oil futures contracts has been historically volatile.

In addition, Brent crude oil prices "may be affected by the recent sovereign debt crisis in Europe."

"Given that oil is a very volatile commodity, you really are just rolling the dice," said Kunhardt.

"The Brent is dependent upon what the Middle East is selling. That index, unlike the U.S. product, is not independent of the other producers of oil. And there's the question of the troubles in Southern Europe. Will the Brent oil futures be affected by that?

"If it was tied to something else than oil, the S&P 500 for instance, I might consider it."

For Cramer, "the good news is that oil supply is being controlled and the price of oil relies on supply and demand."

But the slowdown in Europe and in Asia suggests a reduction of oil demand worldwide, he said, adding that supply would have to be reduced too in order for oil prices not to fall.

Cramer said that he would not consider investing in the notes because the product is designed for bulls only.

"If somebody wants to put some money in oil, this is a good way to do it," he said.

"It's also a great way to hedge your bet, especially with the structure of this deal."

Cramer thinks the price of oil will be less when the notes mature. But "do I think it will be 35% less? Probably not," he said.

The notes (Cusip: 1730T0QJ1) are expected to price on Nov. 23 and settle three business days after that.

Citigroup Global Markets Inc. is the underwriter. Distribution will be through Morgan Stanley Smith Barney LLC.

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