JPMorgan's 10.85%-13.85% airbag notes linked to Halliburton offer good entry point, barrier

By Emma Trincal

New York, Oct. 11 - JPMorgan Chase & Co.'s upcoming airbag yield optimization notes due April 19, 2012 linked to the common stock of Halliburton Co. offer good value given the underlying's stock price and the barrier level on the downside, sources said.

The coupon is expected to be 10.85% to 13.85% per year and will be set at pricing, according to an FWP filing with the Securities and Exchange Commission. Interest is payable monthly.

The payout at maturity will be par in cash unless the final share price is less than the conversion price, in which case the payout will be a number of Halliburton shares equal to $1,000 divided by the conversion price. The conversion price is 70% of the initial share price.

Final barrier

"It's a pretty decent reverse structure," said Marc Gerstein, research analyst at Portfolio 123.

"If you're a reverse convertible investor, this is a reasonable deal. In fact, it's as good as I've seen in a while.

"For one thing, this product has a final barrier, and so it's very different from a traditional reverse convertible where you can get triggered any day, any time. Here they look at the final price, so there is less of a probability to hit the barrier."

In a traditional reverse convertible note, the payout at maturity will be less than par if the underlying stock price falls below the barrier during the life of the notes and finishes below the initial price.

Battered stock

Gerstein also noted that given Halliburton's share price of about $35, the deal offers investors a good "entry point."

The stock price of Halliburton, an oilfield services company, has declined by 13% year to date. In the past six months, the stock has lost 24%.

"A 30% decline from today's $35 share price would be $24.50. It's not like you're pricing off a peak. The current price may not be a trough, but it's well below a peak," he said.

"Besides, 30% is a pretty decent amount of protection for a reverse convertible right now."

Not a 'bogus' name

Gerstein said that he likes the stock sufficiently to be willing to own it even at a lower price.

"And suppose it happens: You bought it at $35 and you own it in the mid $20s. There are worse thing that could happen to people than owning Halliburton at $24. And the coupon softens this. Your loss is reduced by it," he said.

That's because the coupon amount, which at a minimum would be 10.85% per year, cushions downside moves in the stock price by the same amount, in addition to the 30% existing protection, according to the prospectus.

"It's worth a gamble," he added.

"Nothing stops you from using a little hedging with options.

"Even the lowest coupon of 10.85% is a hell of a coupon in this environment.

"Halliburton is not a bogus company. It's not a junkie name. It operates in a substantial industry that's been under pressure, but everything related to energy has been under pressure recently.

"The other issue is if JPMorgan becomes bankrupt in six months then this thing becomes worthless, but unless something crazy like that happens, it's a pretty good product. I would definitely consider it."

Healthy sector

Phil Weiss, energy and oil analyst at Argus Research Corp., who did not have a view on the notes but who sees growth potential in the stock, agreed that the 30% downside protection offers some appeal given today's share price.

"The stock price has dropped, but I think it's overdone," he said.

"It's due to oil prices falling, which has a negative impact for oil companies as it lowers their revenues. But I don't see oil prices continuing to fall indefinitely.

"If the stock was to fall as much as 30%, which I don't think is going to happen, but if it did, it would still be attractive. Halliburton is a solid company well positioned in the oil services, and demand in this sector remains very strong."

The notes (Cusip: 46636T416) are expected to price Thursday and settle Oct. 18.

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

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