Citigroup Global Markets in Texas Instruments-Linked ELKS

Cleary Gottlieb represented Citigroup Global Markets Inc., as underwriter, in Citigroup Global Markets Holdings’ $65.2 million offering of Equity Linked Securities (ELKS) due February 6, 2006, and also acted as special tax counsel to the issuer.  The offering is linked to the common stock of Texas Instruments, a company that makes, markets and sells high-technology components and systems.

ELKS are debt securities that give investors a much higher semi-annual coupon payment than would a standard Citigroup Global Markets Holdings bond of comparable maturity.   At maturity, investors are repaid their full principal amount so long as the price of the underlying stock is greater than a fixed percentage (75% in this case) of its price on the issue date.  If the price of the underlying stock declines by 25% or more as of three trading days prior to maturity, investors receive shares of the underlying stock.  

ELKS also provide a tax benefit to investors because 62% of the semi-annual coupon payments are treated as the payment of an option premium, rather than interest.  As a result, (1) investors are not required to include the option premium portion of the first semi-annual coupon payment in income until maturity or other taxable disposition of the ELKS, and (2) if investors receive stock at maturity, they are not required to include the option premium portion of either semi-annual coupon payment in income at that time, and that portion of the coupon payments instead reduces investors’ basis in the stock.