Citigroup in Freeport-McMoRan-Linked ELKS® Offering

Cleary Gottlieb represented Citigroup Global Markets Inc., as underwriter, in Citigroup Global Markets Holdings’ $75 million offering of Equity Linked Securities (ELKS ®) due May 1, 2006, and also acted as special tax counsel to the issuer.  The offering is linked to the common stock of Freeport-McMoRan Copper & Gold Inc.

Freeport-McMoRan is a company that explores for, develops, mines and processes ore containing copper, gold and silver in Indonesia and smelts and refines copper concentrates in Spain and Indonesia.

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 (77.5% in this case) of its price on the issue date.  If the price of the underlying stock declines by 22.5% 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 58% 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.