The Old Geezer is frequently entertained by Citigroup Funding "principal protected" senior unsecured notes. The PPN MBC is providing the thrills at the moment as it goes down to the wire.
I updated the status of some Citigroup Funding PPN's, owned by our Dear Leader Headknocker, in a post earlier this year. Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ
I will copy some of that material about MBC before describing the fun that the Old Geezer is about to have. The OG is easily entertained by this type of gambling.
"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)
Prospectus: Final Pricing Supplement
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"
Bought 100 MBC at $9.84 (April 2010)
Bought 100 MBC at $9.78 (August 2010)
MBC ends its annual period on Tuesday May 21, 2013. So far, there has not been a Maximum Level Violation during the current coupon period.
The Russell 2000 closed at 975.16 last Friday. ^RUT: 975.16 +8.90 (+0.92%)
One close in that index above 994.03 over the next seven trading days will cause a reversion to a 3% minimum, which is okay in today's interest rate environment based on my average cost per share.
With no close above the Maximum Level, and a hypothetical close at 975 on 5/21/13, the coupon would be 27.51%! (975 minus starting value of 764.64=210.36 point increase divided by starting value of 764.64 to equal the percentage gain in the Russell 2000 for the current annual period.
The price of MBC would crater from its current level with a Maximum Level Violation and has already started to lose some value as the Russell 2000 moves closer to the 994.
Given the market's momentum, my guess is that there will be a Maximum Level Violation and a reversion to 3%. But it will be a horse race to the finish before we know. A decline in the Russell 2000 index next week will be welcomed here at HQ.
After the current annual coupon period ends, there will be one more annual period before this unsecured senior note matures at its $10 par value on 6/9/14. I intend to hold all of the Citigroup PPNs currently owned until maturity.
See, generally, the following Posts on exchange traded bonds:
Item # 1 Principal Protected Notes
Item # 2 Principal Protected Notes