Citigroup Inc. and Morgan Stanley sold $32.5 million of structured notes tied to a U.S. and a European stock index in offerings that may gain value when the relevant benchmark declines as well as when it rises.
Citigroup sold the larger $17.6 million offering of 66-month securities on Dec. 30. The notes yield 1.3 times the gains of the Euro Stoxx 50 Index, as well as the unleveraged absolute value of as much as 35 percent of losses, according to a prospectus filed with the U.S. Securities and Exchange Commission. Investors can lose their entire investment if the index plummets.
The securities, known as “dual directional” or “absolute return” notes, are distinct from other structured notes that yield a set coupon even when protecting against some losses, according to data compiled by Bloomberg.
The notes make sense for “mildly bullish” investors concerned about moderate, short-term losses, said Deryk Rhodes, a Boca Raton, Florida-based executive director at Incapital LLC, a brokerage that specializes in selling structured notes.
Morgan Stanley sold $14.9 million of six-year notes that have a similar structure, Bloomberg data show. The securities, issued Dec. 30, yield 1.15 times the Standard & Poor’s 500 Index’s gains, according to the prospectus. Should the benchmark fall as much as 35 percent, the notes would pay the absolute value of that loss. All capital is at risk if the index falls any more than that.
Morgan Stanley distributed both notes for a maximum fee of 3.5 percent while Citigroup also sold the Euro Stoxx 50 notes on the same terms. Both banks were stakeholders in the world’s largest brokerage, known as Morgan Stanley Smith Barney LLC, until last year. The company changed its name to Morgan Stanley Wealth Management in 2012, and its parent completed its purchase of the wire house last year.
Citigroup estimated its note’s initial value at 93.5 cents on the dollar, while Morgan Stanley’s was 94.7 cents on the dollar.
Lauren Bellmare, a spokeswoman for Morgan Stanley, and Scott Helfman, of Citigroup, declined to comment.
Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.