JPMorgan’s 7.5%-9.5% autocallable yield notes tied to indexes show mild risk, ‘decent’ coupon

By Emma Trincal

New York, Sept. 4 – JPMorgan Chase & Co.’s 7.5% to 9.5% autocallable yield notes due Oct. 3, 2016 linked to the S&P 500 index and the Russell 2000 index offer a moderate amount of risk compared to reverse convertibles recently rated, said Tim Vile, structured products analyst at Future Value Consultants. The coupon is also competitive for an index-based product, he noted.

The notes will be called at par if each index closes at or above its initial level on any quarterly review date other than the final review date, according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable monthly, with the exact rate to be set at pricing.

The payout at maturity will be par unless either index closes below its trigger level, 70% of its initial level, on any day during the life of the notes and either index finishes below its initial level, in which case investors will be fully exposed to the decline of the worst-performing index.

“It’s a fixed-income product linked to two indexes, and it’s designed for investors who want more yield,” said Vile.

He said he used the mid-point of the coupon range, 8.5%, to score the notes.

“It’s autocallable every three months from the initial price, and the call is based on the worst of the two. When you kick out earlier, your capital is safe when it happens. The 70% barrier is generous on a one-year, but it’s an American barrier. You can lose the protection any day during the term if the worst performer drops more than 30%.”

Worst-of payout

While riskier, the worst-of payout offers advantages to investors.

“It’s one way to get a higher coupon without having to depend too much on the high volatility of a stock,” he said.

“It would be very unusual to get that kind of coupon on a one-year from a single index, the S&P alone or even the Russell.

“Using them together as two components in a worst-of allows the issuer to enhance the yield.

“The risk from the worst-of decreases when the two underliers are fairly correlated.

“In this case, while you have small caps versus large caps, you’re also dealing with two U.S. benchmarks reasonably correlated. It allows you to avoid having the exposure to a single stock, which is how reverse convertible notes get done for the most part.”

Low market risk

In its research, Future Value Consultants assesses risk, return and price using a variety of proprietary scores in order to compare a product to others. Each score is compared to the average score for products of the same type but also to the average score for all products.

Risk is measured using two components: market risk and credit risk. By adding the market riskmap and the credit riskmap Future Value Consultants generates its riskmap, which measures on a scale of zero to 10 the risk of a product with 10 as the highest level of risk possible.

At 2.01, the market riskmap of the notes is half the 4.08 average for reverse convertible products, according to Future Value Consultants’ research report.

“There’s less market risk than average. I think one reason is that both indexes are quite correlated,” he said.

“Volatility is also lower compared to most reverse convertibles linked to stocks.”

The JPMorgan notes include an automatic call feature, which also lessens the risk compared to similar products without an autocall, he said.

“Once the autocall kicks out, you get your money back and no more risk.”

Credit riskmap

The credit riskmap of 0.32 is higher than the average of 0.25 for the product type, but it’s less than the 0.52 average for all products, according to the report.

“The credit risk is moderate. It’s the nature of short-term products. In addition, JPMorgan’s credit is pretty good,” said Vile.

Adding the two risk components leads to a 2.33 riskmap versus an average of 4.32 for the product type.

“This product has a definitely lower risk profile than the average of its peers. The worst-of structure may have a lot to do with that as the underlying volatility is lower,” he said.

Return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. The best scenario (bullish in this case) is used to compute the score.

The return score is 6.72 versus an average of 6 for similar products, according to the report.

“It’s quite strong with almost 10% guaranteed per annum depending on where they price it. Also, the risk is very low. These factors contribute to a high risk-adjusted return,” he said.

Price score

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes have a 7.55 price score while the average for the product type is only 5.96.

“The price score is very good. The [almost] 10% coupon is quite generous. The 30% barrier is also good. Even though it’s an American barrier, it’s only one year and 30% is a lot for that term for an index-based deal. All this suggests that the issuer spent enough on the options to bring good value to investors,” he said.

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

Overall, the notes have a 7.14 score versus an average of 5.98 for the product type.

“It’s a strong product. You have a very decent coupon, a reasonable level of risk. The kick-out reduces your risk exposure. The two indexes are favorably correlated,” he said.

“This is a note designed for a bullish investor who wants an above-average yield and who is happy with a target return.”

J.P. Morgan Securities LLC is the agent.

The notes will price on Sept. 25 and settle on Sept. 30.

The Cusip number is 48125UV33.

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