JPMorgan’s step-down trigger autocall tied to Russell, Stoxx show novelty, some merits

By Emma Trincal

New York, Feb. 8 – JPMorgan Chase Financial Co. LLC with its 0% step-down trigger autocallable notes due Feb. 14, 2022 linked to the lesser performing of the Russell 2000 index and the Euro Stoxx 50 index is showing a slightly novel structure. A hybrid between a traditional autocallable, which pays a premium upon the call and an autocallable contingent coupon note, which lets investors accumulate coupon payments, the structure has some advantages but is also complex, sources said.

The notes will be automatically called at par of $10 plus a call premium – expected to be 8% to 9% per year – if each index closes at or above its initial level on the first, second, third or fourth annual observation dates or each index finishes at or above the downside threshold, 60% of the initial level, at maturity, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not subject to an automatic call, then the final level of at least one index will be less than its 60% downside threshold, and investors will lose 1% for each 1% decline of the lesser-performing index from its initial level.

Barrier at the end

“It’s a slight variation of the typical autocall,” a market participant said.

“Normally with an autocall, the coupon barrier and the call trigger are both at par. You get paid when you’re called.

He described a second type, often named autocallable contingent coupon notes.

“That second type of autocall has the call at par also. But the coupon barrier and the protection at maturity are below par, like for instance 80% or 70%.”

The JPMorgan notes had elements of both types.

“Some people make it more complex. With this deal, the autocall coupon and the autocall level are at par all the time until the last date. Then the coupon level drops to 60%,” he noted.

Since the structure offers a “memory coupon” – coupons that accumulate as time elapses – investors if not called during the life of the notes could still earn the full premium for the entire five years even if the worst index finishes negative as long as it does not drop more than 40%, he explained.

Merits

“It’s a nice feature,” he said.

“I never traded it. I don’t know how much it costs. It was mentioned to me by Goldman Sachs four or five years ago.

“Essentially, it’s a complex structure. But it has its merits.”

The tenor for the product however was a drawback.

“Five years is a hell of a long time,” he said.

Among the “merits,” this market participant cited pricing prior to maturity.

“If one of the indexes tanks by 20% at the beginning and you miss all the coupons, the product will not go down so much in the secondary market,” he said in comparison to a straight autocallable with barrier and call trigger at par.

“And that’s because the issuer still has to count the cumulative coupons at maturity because of this final below-par barrier.

“It stabilizes the product a little bit.”

Last chance

For investors, the “best scenario” would be not to be called on the first year, as it would increase the probabilities of receiving the full payment at maturity.

Calls are more likely to happen at the earliest call dates statistically, he said.

Investors buying this note at the early stages of a bear market would maximize the chances of getting the full return.

“If you get to keep it until maturity, you earn after five years five times 9%...that’s 45%. Not bad considering how you started,” he said.

But those advantages have a price: the structure is more difficult to understand.

Not a KISS

A financial adviser said he did not like the product precisely because of that.

“It’s too complicated,” he said. “My clients like simple structures. If I can’t explain it in less than two minutes, it’s not going to work.”

Most of the time, his clients hire him to manage their account and give him discretion to make the best decisions.

“All they want to know is: have you made money, have you lost money?

“But some have questions. They need to understand the product, especially when they receive their statements each quarter.

“And if you have to go through those scenarios, like...if the underlying does this and that, then you get that, otherwise, you get this. They’re left scratching their heads.

“I can’t pitch a deal like that to a client.

“We like KISS: Keep it simple, stupid.

“This is not a KISS type,” he said.

The notes will be guaranteed by JPMorgan Chase & Co.

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

The notes (Cusip: 48129F887) will price on Friday and settle on Feb. 15.

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