JPMorgan's autocallable deals tied to BP, Anadarko offer top call premiums with extra risk

By Emma Trincal

New York, June 23 - JPMorgan Chase & Co. priced two autocallable notes linked to offshore drilling companies in a bid to offer exceptionally high call premiums.

One is linked to BP plc, whose stock price has fallen by more than half since the Deepwater Horizon oil spill began in April, and the other to Anadarko Petroleum Corp., a company also related to the disaster.

BP deal

JPMorgan priced $5 million of 0% autocallable optimization securities with contingent protection due June 24, 2011 linked to the American Depositary Shares of BP, according to a 424B2 filing with the Securities and Exchange Commission.

If BP's ADSs close at or above the initial ADS price on any of 12 monthly observation dates, the notes will be automatically called and investors will receive par of $10 plus an annualized call premium of 48%.

The observation dates are July 19, Aug. 18, Sept. 20, Oct. 18, Nov. 18, Dec. 20, 2010, Jan. 18, 2011, Feb. 18, 2011, March 18, 2011, April 18, 2011, May 18, 2011 and June 20, 2011.

If the notes are not called and the final ADS price is greater than or equal to 50% of the initial price, the payout at maturity will be par. If the final ADS price is less than 50% of the initial price, the payout will be par plus the ADS return.

UBS Financial Services Inc. and J.P. Morgan Securities Inc. are the agents.

Anadarko deal

Separately, JPMorgan priced a $5 million offering also distributed by UBS linked to the share price of Anadarko Petroleum, whose stock price has fallen by 45% since April when the rig explosion occurred.

Anadarko and BP are in dispute over the liability payments for the Gulf of Mexico oil spill.

Stocks of offshore drilling companies as a whole have been hit by the disaster due to the legal liabilities, a potential six-month moratorium in the United States and new drastic regulations those businesses face.

JPMorgan's 0% autocallable optimization securities with contingent protection due June 24, 2011 linked to the common stock of Anadarko offer an annualized call premium of 61% if the shares close at or above the initial share price on any of 12 monthly observation dates. There is a 40% buffer.

Not many precedents

Data compiled by Prospect News revealed that it has not been common for issuers in the past to price notes linked to either one of the two oil stocks.

The notes linked to the shares of BP are the first to price since the disaster. Prior to April, this underlying stock had only been used once - in March of this year - when JPMorgan priced $2.2 million 8% upside auto callable reverse exchangeable notes due March 4, 2011.

JPMorgan is not alone in trying to tap into the risky BP stock in order to price a product with an exceptionally high payout.

On Friday, Royal Bank of Canada is expected to price 24.75% reverse convertible notes due Sept. 30, 2010 linked to BP shares, according to an FWP filing with the SEC.

The payout at maturity will be par in cash unless BP shares fall below 65% of the initial price during the life of the notes and finish below the initial price, in which case the payout will be a number of BP shares equal to $1,000 divided by the initial price.

The last time a note was priced on Anadarko shares prior to the April rig explosion was in November 2009. UBS AG then priced $2.88 million of 10.08% yield optimization notes with contingent protection due Feb. 19, 2010 linked to this stock.

Since the oil spill and prior to the JPMorgan deals, only one issuer, Barclays Bank plc, had sold a deal on Anadarko. It sold $1.25 million of 27.4% reverse convertibles due Dec. 20, 2010 linked to the stock featuring a 30% buffer.

Sources are divided over the soundness and profitability that notes tied to the stocks of companies involved in America's biggest offshore spill may offer at this time. Many investors, they noted, believe that bankruptcy is looming for BP.

Danger zone

Talking about the BP-linked notes, a New York sellsider said, "This is not a good product in my view. It's for people who think the stock has reached its lowest level on the strike. To me, it's another potential Lehman. I wouldn't touch this product."

Given the high level of risk, "paying a 48% coupon is doable but insane," he said.

"The bet is that the crisis is behind us and that the bankruptcy will be avoided with the $20 billion fund. Honestly, I am skeptical and I am surprised to see JPMorgan doing this," he said.

This sellsider said that he would also be very cautious regarding the Anadarko deal.

"With the potential drilling restrictions, it's going to be hard for those companies to make money," he said.

"Let's just say these are for very aggressive and fearless investors," he added.

Contrarian opportunity

But others saw an attractive opportunity.

"I've personally been looking at BP wondering how much further they can go down knowing that they will recover. I think it's a very interesting bet," said Lisa Smith, vice president at Bankers Financial Services.

"I don't know if they've hit bottom yet, but you have the $20 billion fund. It's a very contrarian bet, but one that I would be willing to take," she added.

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