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Citi & Morgan Stanley Issue $32.5M Notes


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According to Bloomberg, Citigroup Inc. (C - Analyst Report) and Morgan Stanley (MS - Analyst Report) sold dual directional structured notes worth $32.5 million linked to Euro Stoxx 50 Index and Standard & Poor’s 500 Index, respectively. The gains from these notes are directly related to fluctuation in the benchmark of these indices.

Citigroup issued five-and-half-year notes worth $17.6 million, having an estimated initial value of 93.5 cents, on Dec 30. The notes have a yield rate of 1.3 times the gains of the Euro Stoxx 50 Index. On the other hand, Morgan Stanley sold six-year notes worth $14.9 million, having an estimated value of 94.7 cents on Dec 30. The securities yield 1.15 times the gains of the Standard & Poor’s 500 Index.

Further, both the notes provide investors an unleveraged absolute value of as much as 35% of losses of the respective indices. However, if the an index falls below the specified cap of 35%, investors will lose their entire capital.

Dual directional notes have gained popularity in recent times. Earlier, in 2012, JPMorgan Chase & Co. (JPM - Analyst Report) had issued similar securities based on the performance of the S&P 500 index, subject to a 15% cap and an 80.7% barrier. Banks issue such structured notes by packaging debt along with derivatives to investors, while earning fees and raising money at the same time.

The dual directional securities, also known as absolute return notes, are generally based on the possibility of returns in markets that are comparatively less volatile.  These notes are unique because investors get a positive return even if underlying asset decreases in value within a pre-specified range. However, investors will lose their whole capital if the benchmark falls below the barrier level.

Currently, Citigroup has a Zacks Rank #4 (Sell) and Morgan Stanley has a Zacks Rank #3 (Hold). A better-ranked stock in the same sector is Bank of America Corp. (BAC - Analyst Report) with a Zacks Rank #2 (Buy).

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