Citi’s $8.12 million 14.25% autocalls on Charles Schwab to meet income needs with risk

By Emma Trincal

New York, June 22 – Citigroup Global Markets Holdings Inc.’s $8.12 million of 14.25% autocallable equity linked securities due July 16, 2024 linked to the common stock of Charles Schwab Corp. offer the peace of mind of a fixed coupon but the downside risk at maturity can be substantial given the exposure to a single stock in a volatile sector.

Interest is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically starting Dec. 13, 2023 at par if the price of the underlying stock is greater than or equal to its initial price on any subsequent quarterly valuation date.

The payout at maturity will be par if the stock ends at or above its 71% final barrier. Otherwise, investors will have full exposure to the stock decline.

Income play

“For someone who wants income, I would take this in a heartbeat. It’s a good coupon and it’s a fixed rate. You’re probably going to get called though,” said Scott Cramer, president of Cramer & Rauchegger.

The risk-adjusted return was satisfying.

“You’re getting a good premium over short-term Treasuries yielding 5% and that’s to take the risk of a 30% decline,” he said.

Strong company

Given the size of Charles Schwab, its diversified operations and capitalization, the company appeared to be well-positioned to face potential headwinds.

“Schwab is a solid enough company,” he said.

“They were negatively impacted by the banking crisis back in March. But it’s important to remember that the regional banks which failed at the time had problems unique to them. It was not a systemic crisis,” he said.

He was referring to two regional banks which failed in March – Silicon Valley Bank and Signature Bank.

Market, interest rate risks

The underlying stock on the trade date closed at $54.75, which set the barrier level at $38.873, according to the prospectus.

“You get started at a price that’s 37% off the January high,” he said.

“The stock is a bit undervalued because people were scared by the banking turmoil three months ago.”

Rising interest rates at the time generated losses in the value of the long-term Treasury bonds sitting on the books of financial institutions. Outflows of deposits chasing higher rates in short-term Treasuries or money markets intensified the liquidity and confidence crises.

“Schwab could still face that type of risk. They’re not entirely immune to a blowup. But they have strong cash reserves and manage that risk pretty well,” he said.

High-yield

Jeff Pietsch, founder of Capital Advisors 360, said he liked the notes as a high-yield play but insisted on risks, including market, counterparty, company and recession risks.

“It’s the equivalent of a high-yield bond in a traditional bond market. It’s a healthy premium paid to compensate investors for the single stock risk,” he said.

The financial industry has struggled to recover from the March banking crisis, he noted.

“Although things have stabilized since, banks are still subject to the possibility of an economic slowdown and a systemic shock,” he said.

Due diligence a must

The 14.25% annualized interest will be paid for at least the first six months due to the no-call feature during that period, which gives investors the guarantee of earning at least 7.12% in interest, he said.

But the 70% barrier had been breached in recent times,” he added.

“At 30% the barrier level is roughly equivalent to where the stock was trading during the pandemic back in 2020,” he said.

“Of course, you have six months’ worth of coupon payments, which can somehow be used as a buffer. But that’s not much and there’s still very significant risk.”

Investors also faced counterparty risk.

“Default risk is a given when you buy any structured note,” he said.

Finally, the company risk associated with Charles Schwab had to be examined prior to buying the notes.

“Schwab has so many lines of business. You have Schwab Bank and Schwab the giant brokerage firm. I think Schwab is a complicated business. You need to do your due diligence,” he said.

Keep it small

To conclude, Pietsch said that the notes would be a good choice for an overall high-yield strategy.

“It’s a high-yield option for a very small portion of the portfolio. Just like individual stocks are invested in limited allocations, you want to limit the exposure to this offering,” he said.

“The fee, which is over 2%, seems a bit high for such a short-term note,” he added pointing to the 2.15% fee amount disclosed in the prospectus.

“That said, the structure is still quite attractive. You just need to be aware of the downside risk, which is significant.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on June 16.

The Cusip number is 17291RB43.

© 2015 Prospect News.
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