Sunday, February 3, 2013

Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ

Some readers are interested in the Citigroup Funding "principal protected notes" that I currently own. Those notes are senior unsecured debt obligations of Citigroup Funding, a wholly owned subsidiary of Citigroup who guarantees the notes as provided in the prospectuses. 

Each of the notes will mature in 2014 at their $10 par value. All of the ones that I own trade on the stock exchange and are included by me in the category of Exchange Traded Bonds

I currently own the following Citigroup Fund PPNs:

Bought 100 MKN at $9.85
Bought 100 MKZ at $9.96
Bought 100 MKZ at $9.91 in the Roth IRA
Bought 100 MOU at $10.12
Bought 100 MBC at $9.84
Bought 100 MBC at $9.78
Bought 100 MTY at $10.03
Bought 100 MTY at $10.49
Bought 200 MOL at $9.95-Sold 100 MOL @ $10.3 November 2010
Added 100 MOL at $9.78

Item # 1 Principal Protected Notes
Item # 2 Principal Protected Notes

This notes are in no way "principal protected" in the event of a Citigroup bankruptcy. These notes are unsecured senior obligations and would be in the same undesirable position as any other senior unsecured note issued by Citigroup Funding and guaranteed by Citigroup in the event of a bankruptcy. In short, the owners of these PPNs would be screwed in that eventuality. Anyone buying a PPN needs to read the prospectus until there is full comprehension about this type of security. 

I am not interested in buying more of these notes or in selling what I now own. I am likely to hold all of them until maturity unless there is an unexpected and serious change in Citigroup's risk profile.  

I wanted to update the status of those notes whose current annual periods end before June 30th.

I recently updated the status of Citigroup 3.00% Principal Protected Notes linked to Russell 2000 Index (MOU). Since that one is near the end of its current annual period, I will start with where it stands now. 

1. MOU: I updated the status of this PPN in a 1/3/13 post and I will copy and edit some of that discussion: Stocks, Bonds & Politics: MOU Update 

Two of my senior unsecured notes issued by Citigroup Funding, and guaranteed by Citigroup, pay the greater of 3% on a $10 par value or up to a percentage increase in the Russell 2000. Of those two notes, MOU is closer to its annual end date than MBC.

MOU can pay up to 37%.

The relevant data points on MOU are as follows:

Starting Value as of 2/23/12=829.23
Maximum Level Violation Number=1,136.04  (829.23 x. 1.37)
End Date For Current Annual Coupon Period: 2/22/13

Pricing Supplement

The Russell 2000 closed last Friday at 911.20: RUT: 911.20 +9.11 (+1.01%) 

It would be reasonable to postulate that there will not be a maximum level violation caused by one close above the maximum level number of 1,136.04 on or before 2/22/13.

A Maximum Level Violation causes a reversion to the 3% minimum coupon irrespective of the percentage performance of the Russell 2000 between the Start and End Dates.

It is likely now that I will receive more than 3% during the current annual period, assuming the Russell 2000 does not close below 854.1 on 2/22/13, the point where any increase would be greater than 3%.  How much, if any, more is anyone's guess.

A close at 900 on 2/22/12 would result in a 8.5% coupon for example (900 minus starting value of 829.23=70.77 divided by 829.23=8.5%) A close at 1000, which is far fetched now, would result in a 20.59% annual interest coupon.

If the close on 2/22/13 was identical to the close on 2/1/13, which of course will not happen, the coupon would be about 9.88%.

As previously noted, I hit a pay day with a 27.93% coupon in the annual period ending in February 2011. (see snapshot at MBC & MOU). The last annual coupon was 3.7% (see snapshot at Item # 3 MOU)

This senior unsecured note matures in 2014 at its $10 par value. In addition to the current coupon period, there will be just one more before maturity.

As previously noted, given my cost in these securities and the current low interest rates, I am content to receive the minimum coupon.  Item # 1 Added 100 MOL at $9.78

FINRA Information: Citigroup Fixed Coupon Bond Maturing in 2014-Current YTM 1.68%

2. MBC: I own 200 of this PPN, with the position bought at less than its $10 par value. Like MOU, the coupon is tied to the performance of the Russell 2000.

MBC can pay up to 30%.

The current annual period ends on 5/21/13.

This is a summary of the relevant data points:

Starting Value of the Russell 2000: 764.64
Maximum Level=994.032 (764.94 x. 1.3)

While there has been no maximum level violation yet, this one is certainly moving closer to a close above the Maximum Level which would trigger the reversion back to its 3% minimum coupon.

If there was no Maximum Level Violation, defined to mean a single close above the Maximum Level for the current annual period, and the Russell 2000 closed at 911 on 5/21/13, this one will generate a nice coupon of 19.14%. (911-764.64 starting value=146.36 divided by 764.64=19.14%).

Assuming Citigroup survives to pay par value, the worst that can happen is a 3% coupon for each of the remaining annual periods, including the one ending in May 2013.

I am content to receive the minimum particularly since I have the opportunity at least to receive a lot more.

MBC has some potential for the current coupon period as long as the Russell 2000 Index can stay below 994 between now and 5/21/13, and there is not a significant correction by the closing date.

There was a Maximum Level Violation for MBC's annual coupon period ending in May 2011 which caused a reversion to the 3% annual coupon, so I received $60 in interest for my 200 shares for that period.

The May 2012 period also ended with a 3% coupon payment for a different reason, the Russell 2000 declined from that periods starting value. Item # 2  MBC-3% Coupon for Third Annual Coupon Period

3. MKN: This one matures on April 7, 2014. I own 100 MKN, with the shares bought at below its $10 par value. MKN's coupon is tied to the performance of the UBS Commodity Index: DJUBS Quote - Dow Jones-UBS Commodity Index - BloombergChart -

The current annual period ends on 4/1/2013:

Starting Value on 3/30/12=141.902
Maximum Level=188.73 (rounded)(141.903 x. 1.33)

Prospectus: Pricing Supplement

Last Friday, this index closed at 142.89. Given the relatively short time left, I would view a Maximum Level Violation to be unlikely.

To generate more than a 3% coupon during the current annual coupon period, there must be NO Maximum Level Violation on or before 4/1/13 and a close above 146.16.  A close at 165, with No Maximum Level Violation, would produce about a 16.28% coupon.

MKN allows up to a 33% increase in the coupon with a 3% minimum. If the index closes one day during the annual period above 33% over the starting value, there will be a reversion to the 3% coupon, no matter what happens thereafter. Again, I call that reversion feature the "Maximum Level Violation".

I am more concerned that the index will not gain enough by 4/1/2013 to trigger an increase in the 3% minimum. 

I did receive a 18% coupon for the MKN annual period ending in March 2010:  Note ON MKN

2010 MKN Interest Payment on 100 Shares +$180.06 (incorrectly noted as a dividend)

The next coupon was even better at 25.56%: Item # 4 MKN Closes with a 25.56% Gain 

100 MKN SHARES 2011 Interest Payment

4. MKZ: Unlike MKN, which has done well so far, MKZ has been a dud, paying only its 3% minimum coupon during my ownership. I own 200 MKZ bought at below its par value. 

Like MKN, MKZ's coupon is tied to the UBS Commodity Index. This unsecured senior note matures on 7/11/2014 at its $10 par value. MKZ may pay up to 31%. 

Relevant Data Points:

Starting Value on 6/25/12: 130.56
Maximum Level: 171.033 (130.56 x. 1.31)
Closing Date: 6/24/13

Prospectus: Pricing Supplement

As noted above, the UBS Commodity index closed last Friday (2/1/13) at 142.89. 

This one has some potential to pay more than its 3% minimum but is also in danger of suffering the Maximum Level Violation given the current index level and the time remaining in the current annual period. 

MKZ suffered a Maximum Level Violation in its coupon period ending 6/23/11. MKZ Reversion to Its 3% Guarantee 

The 2012 period ended with a decline in the commodity index from the starting value which resulted in the 3% minimum coupon. Item # 1 MKZ Ends Annual Period-Paying 3% Minimum Coupon 

If there was a close at 143 on 6/24/13, with NO Maximum Level Violation, the coupon would be about  9.53%. A close at 160 with NO Maximum Level Violation would produce about a 22.55% coupon.

To generate more than 3% during the current annual period, there must be no close above 171.033 on or before 6/24/13 and a close above 134.4668. (1.03 x. starting value of 130.56). 

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