JPMorgan’s $4.2 million autocalls on Stoxx may not yield the best return, distributor says

By Emma Trincal

New York, Feb. 15 – JPMorgan Chase Financial Co. LLC’s $4.2 million of 0% autocallable buffered return enhanced notes due Feb. 13, 2025 linked to the Euro Stoxx 50 index appear attractive in delivering two distinct types of payouts combining income and growth. But a closer analysis of the potential outcomes makes the structure less compelling, said Brady Beals, director, sales and product origination at Luma Financial Technologies.

The notes will be called automatically at a premium of 16.05% if the index closes at or above its initial value on Feb. 22, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the index gains, the payout at maturity will be par plus 200% of the index return.

Investors will receive par if the index declines by no more than 15%. Despite the name of the deal, the 15% is a barrier. Investors will be fully exposed to the loss of the index if it declines beyond 15%.

A mixed bag

“We don’t do any of these one-time autocall,” said Beals.

“Yes, the 16% call premium looks good. But you may not get called. If that’s the case, you are negative at the end of the first year and you only have another year to recover.”

This type of hybrid structure cannot be compared to a pure leverage play given the call feature, which strikes midway, he said.

The note couldn’t be categorized as a typical autocall either.

“You can’t compare it with a Phoenix autocall. With the Phoenix, you may collect income and your coupon barrier is below 100.”

This is why contingent coupons in Phoenix autocalls are lower than call premium, which are earned at a higher strike, he added.

“When looking at the call feature of this note, you really have to compare it to a snowball because in both cases, your call strike is at 100,” he said.

Snowball

Snowballs are a type of autocall in which the premium increases on each observation date allowing the note to “accumulate” the premium over time. As with other autocalls paying a premium, the call is triggered automatically when the underlier closes at or above its initial price.

“With an 85% barrier, I would expect the equivalent snowball to also price around a 16% premium,” he said.

He then compared the outcomes for each product.

“If you miss the call, the snowball gives you 32% at maturity as long as you don’t finish negative,” he said.

“But with this note, the index is going to have to go up. You start the second year negative since you’ve missed the call on year one. To achieve the same 32% return at maturity and since you have 2x exposure, the index needs to be up 16% during the second year.”

Such growth was not necessarily easy to achieve, he noted.

“The market has to recover pretty quickly. You have to go from negative to +16% in just one year,” he said.

“The leverage at the end of year two is a little bit of a waste. It doesn’t help you all that much.”

In contrast, the snowball would require no growth at all in order to yield the 32% return at maturity.

One way to improve the odds of success for investors in the JPMorgan note would be to increase the tenor so that if the call is missed after one year, there is more time to recover, he said.

But most investors do not wish to hold a note for too long.

“We just don’t do those products in general,” he said.

Bullet alternative

Autocallables themselves have their limitations, he noted, pointing to digital notes as a compelling alternative to callable products, especially for investors who do not need the income and who do not welcome early redemptions. Digitals offer other benefits as well.

“RIAs like digitals for the tax treatment. If it’s longer than one year, you can capture capital gains as opposed to ordinary income. You also don’t have the reinvestment risk, which many advisers don’t care for.”

Getting called after a short period of time and having to replace the note with another source of income can be time-consuming and challenging for some advisers and clients alike, he explained.

Despite their differences, digitals, Phoenix autocalls and snowballs have consistent payout profiles unlike the recently priced note, which mixes call and leverage feature under one structure, he added.

“I have a negative bias toward those hybrid notes. I don’t know what you accomplish having this growth feature at maturity,” he said.

KISS principle

A market participant said he would not recommend the notes.

“It’s too complicated. When marketing that type of product, you have too many things, too many scenarios to describe,” he said.

“I’m not a fan. I like simple. You know? KISS principle.”

The acronym “KISS” stands for “keep it simple, stupid.”

Part of the difficulty to explain the notes was due to the existence of two different outcomes – either a call mid-term or growth at the end, he said.

“Anytime you have those hypotheticals, you can’t really give the client a good sense of the product. You’re going to lose them half-way into your pitch,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The Cusip number is 48133UCP5.

The fee is 1.5%.

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