Market volatility spawns high coupons on reverse exchangeables; JPMorgan plans notes tied to energy

By Sheri Kasprzak

New York, Feb. 4 - Market volatility, especially among banking stocks, may be pushing bigger coupons among structured product offerings, some market insiders said Wednesday. The big coupons, however, seem to be limited to certain sectors and even to certain stocks.

"Anytime you've got a really volatile market, you're going to get bigger coupons," said one market source reached Wednesday afternoon.

"In a sector like banking, where you've got a lot of volatility, you're bound to see bigger coupons, so that's no surprise."

In fact, a lot of upcoming and recent reverse exchangeables with higher-than-normal coupons have been linked to banking stocks.

JPMorgan, Wells Fargo stocks linked

ABN Amro Bank NV plans to price a note with a 20% coupon linked to JPMorgan Chase & Co. The JPMorgan-linked notes have a 50% barrier level.

Recently, ABN Amro sold $100,000 in 25% Knock-in Reverse Exchangeable Securities linked to Wells Fargo & Co. with a 60% knock-in level.

On the opposite side of the coupon spectrum, JPMorgan itself is planning to price reverse exchangeables linked to Peabody Energy Corp. with a mere 5.5% coupon. The Peabody notes have a 40% protection level. Some other notes JPMorgan is planning to sell have relatively low coupons, including an offering of 5.875% reverse exchangeables linked to shares of Freeport-McMoRan Copper & Gold Inc. and 6.25% notes linked to United States Steel Corp. Both of those notes also offer 40% protection.

Even so, ABN Amro recently sold $1.2 million in 20.75% Knock-In Reverse Exchangeable Securities linked to Freeport-McMoRan shares. Those notes priced with a 50% knock-in level.

Shares of JPMorgan were off by a penny on Wednesday to end at $24.04 and down another 12 cents in after-hours trading (NYSE: JPM). The stock fell by $1.15 to end at $24.05 on Tuesday.

Wells Fargo's stock was also down on Wednesday, giving up 74 cents to close at $17.45 (NYSE: WFC). Shares of Wells Fargo lost 70 cents on Tuesday to settle at $18.53.

Shares of Peabody were also off on Wednesday, losing 21 cents on the day to end at $26.34 (NYSE: BTU). Peabody's stock was up 94 cents Tuesday to close at $26.55.

Freeport-McMoRan's stock ended the day on an up note, gaining $2.11, or 8.38%, to end the session at $27.28 (NYSE: FCX). The stock was also on up Tuesday, gaining 58 cents to close at $25.17.

Shares of United States Steel were also up, gaining $1.39 to close at $30.41 (NYSE: X). On Tuesday, the stock gained 84 cents to close at $29.02.

Individual stocks a factor

Another market insider said Wednesday that the volatility level may even depend upon each individual reference stock.

"You can't even really point to a sector and say, 'every stock from this sector is going to pull a 20% coupon.' It's gotten more complex than that. Now you're basically looking at each stock," he noted.

In fact, ABN Amro recently sold $750,000 in 28% Knock-In Reverse Exchangeable Securities linked to solar panel module manufacturer First Solar, Inc. shares.

JPMorgan's energy stock basket

In other upcoming offerings, JPMorgan plans to price buffered return-enhanced notes tied to a basket of seven energy stocks.

The notes pay double the appreciation of the basket, capped at 50.2% maximum total return.

The stocks include XTO Energy Inc.; Noble Energy, Inc.; Chesapeake Energy Corp.; El Paso Corp.; Newfield Exploration Co.; Pioneer Natural Resources Corp.; and Encore Exploration Co.

If the stock basket declines by more than 10%, investors can expect to lose 1.1111% of their principal amount for every 1% beyond the 10% barrier the basket falls.

The 18-month notes are set to price Thursday.

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