JPMorgan’s $30.71 million trigger phoenix autocallables on Euro Stoxx, Russell seen as ‘long’

By Emma Trincal

New York, June 17 – Despite having a protective barrier at maturity, JPMorgan Chase & Co.’s $30.71 million of trigger phoenix autocallable optimization securities due June 18, 2025 linked to the worst performing of the Euro Stoxx 50 index and the Russell 2000 index were seen as relatively risky by a market participant given the duration and also the worst-of payout.

The notes pay a contingent quarterly coupon at an annual rate of 8.5% if each index closes at or above its coupon barrier level, 70% of its initial level, on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each index closes at or above its initial level on any quarterly observation date after one year.

The payout at maturity will be par plus the final contingent coupon unless either index finishes below its 50% trigger level, in which case investors will be fully exposed to the decline of the worse performing index.

10 years

“I don’t like that it’s so long,” the market participant said.

Some participation notes with full principal protection have been brought to market with shorter durations, he noted, such as seven-year tenors.

The autocallable structure, however, is designed to shorten the product, and investors expect the notes to be called.

“People buy it assuming it’s going to get called early,” he said.

The 70% coupon barrier offers some value. The 8.5% contingent coupon, which is not based on the return of a single stock but on the performance of the indexes, appears attractive as well, although it depends on pricing, he said.

Still, the structure is relatively risky, according to this market participant.

Key risks

The prospectus in its “key risks” section disclosed the possible negative outcomes.

First, the coupon is contingent and not guaranteed. The indexes need to be above the coupon barrier of 70% in order for investors to collect the coupon on any quarterly observation date.

The protection at maturity is also contingent. While the barrier is low, it is still not a buffered protection, the market participant noted.

The worst-of payout exposes investors to greater risks, according to the prospectus, in terms of coupon and principal repayment. Both indexes need to close above specific price thresholds for the coupon to be paid, the autocall triggered and the principal amount fully repaid.

The prospectus noted an increase in risk when the two indexes are not correlated.

Finally, the credit risk exposure could last for 10 years if the notes are not called.

“Even with the 50% barrier, investors are taking a lot of risk. It’s a pretty long-term note,” he said.

UBS deal

UBS Financial Services Inc. was the distributor of the deal, according to the prospectus.

“They did it on UBS’ platform with JPMorgan as an issuer. We’ve seen some of that,” he said.

“JPMorgan, UBS, Morgan Stanley ... All the old distributors who used to stay apart from each other are starting to work with one another.

“Definitely we’ve seen JPMorgan issue into Morgan Stanley’s platform.

“We’re seeing a lot of retail. It’s not surprising to see UBS selling a JPMorgan-issued note.”

Perception

An industry source said the final, or European, barrier is attractive.

“I think it’s a good deal,” he said.

“Most investors would feel comfortable with a 50% barrier at maturity, especially if it’s a 10-year note.

“That’s because a lot of advisers will tell you that long term, there is less risk to see indices closing below their initial level. Their expectations are that the market will be up long term.

“Sometimes there is a difference between pricing and expectations.”

Both sources said they could not assess the terms because they did not price the deal themselves.

But the industry source said he understands why the offering was well bid.

“It makes total sense to invest long-term while extracting some value with a decent coupon. A lot of people are interested in that kind of deal,” he said.

“Of course it’s not without risks, but that’s how you get better terms.”

The notes (Cusip: 48127X476) priced on June 12.

The fee was 3.5%.

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