JPMorgan, Lehman offer CDs linked to CMS spreads; interest in CDs could be limited, analyst, advisor say

By Kenneth Lim

Boston, Aug. 8 - Issuers continued to launch structured certificates of deposit on Friday, with JPMorgan Chase Bank and Lehman Brothers Commercial Bank offering products linked to CMS rates.

"Some investors may think it may be beneficial to have a CD instead of a note," Future Value Consultants analyst Suzi Hampson said.

JPMorgan plans to price callable leveraged spread CDs due Aug. 29, 2023 linked to the 30-year and 5-year CMS rates.

The CDs will pay interest quarterly in arrears on the 29th of February, May, August and November of each year. The initial interest rate, on an annualized basis, will be 9%. After that, the annualized coupon will be the lesser of 0% and 12 times the 30-year CMS rate minus the 5-year CMS rate, subject to a maximum coupon of 15%.

The CDs may be called on each interest payment date from Aug. 29, 2009 onwards.

Lehman Brothers priced $500,000 of interest rate linked CDs due Feb. 22, 2023 linked to the 30-year and 2-year CMS rates.

The Lehman CDs, which were sold in $1,000 multiples, will pay interest quarterly on the 22nd of February, May, August and November each year. The initial interest rate until the period ending Aug. 21, 2009, is 10% on an annualized basis. Subsequently, the annualized coupon will be the lesser of 0% and 10 times the 30-year CMS rate minus the 2-year CMS rate, subject to a maximum coupon of 10%.

The Lehman CDs will be callable beginning Aug. 22, 2009.

CDs sometimes similar to notes

Structured CDs and notes are not necessarily very different products, said Future Value's Hampson.

"I can't think of any reason investors would want CDs unless a client specifically asks for it," she said. "Maybe the taxes in some way may be better for some reason, but I can't think of any reason why better terms might be offered...It just might fit some investments better."

Hampson noted that a recent JPMorgan contingent payment dual directional knock-out CD due Aug. 28, 2009 linked to the S&P 500 Index was very similar to a UBS AG principal protected absolute return barrier note due Aug. 28, 2009 linked to the S&P 500.

The JPMorgan CD had upper and lower thresholds of plus and minus 13% to 15% of the initial index level, while the UBS notes had thresholds of plus and minus 16% to 18%. Both have participation rates of one.

"When it comes to pricing they may settle on some other figure, but just looking at them it doesn't look like they're offering better terms necessarily," Hampson said of the UBS notes.

CDs less risky than notes

But an investment advisor said CDs are less risky products than notes because CDs are FDIC insured.

"It's insured by the government," the advisor said. "You're not exposed to the risk of issuer default."

But the advisor said investors the amount that is insured in the CD is limited.

"The bank can only insure you for up to $100,000," the advisor said. "That's fine for many retail investors, but for some of the higher net worth clients and institutions, that might not be enough. And CDs usually come with lower yields, so if that amount of insurance isn't significant enough for you, you may be better off getting a note. The other thing is a lot of the banks actually still have very solid credit. Spreads are wider now and definitely there's a sense that there's a bit more risk involved even in the banks, but by and large a lot of them are still strong enough that the risk of a default is pretty slim."

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