JPMorgan’s autocallables tied S&P GSCI Brent Crude Oil: ‘great’ terms, volatility unsettling

By Emma Trincal

New York, Dec. 18 – JPMorgan Chase & Co.’s contingent income autocallable securities due Dec. 31, 2015 linked to the S&P GSCI Brent Crude Oil Index Excess Return offer an eye-catching annualized coupon, but buysiders are not necessarily ready to bet on a turnaround of the distressed oil sector.

The notes will pay a contingent quarterly payment at a rate of at least 15% per year if the index closes at or above the 85% downside threshold level on the determination date for that quarter, according to an FWP filing with the Securities and Exchange Commission.

The notes are autocallable at a lower level than usual with a redemption threshold level of 95% of the initial level. If on any quarterly determination date other than the final date, the index is at or above this 95% threshold, the notes will be called at par plus the contingent coupon.

If the notes are not called and the index finishes at or above the 85% downside threshold level, the payout at maturity will be par plus the contingent payment.

Otherwise, investors will share in any losses.

Volatile oil

“If I was willing to speculate on oil, I’d say it’s a pretty good deal. But I’m not too comfortable with the risk/reward,” said Steve Doucette, financial adviser at Proctor Financial.

“Oil is in a bear market. If we could have projected the plunge of oil prices we would be short oil. Now comes the hard part,” he said.

He commented on the return of the S&P GSCI Brent Crude Oil Index Excess Return, which shows that the bulk of the downtrend occurred recently.

The index for the year is down 36.41%, but it has lost 33.36% in the past three months, according to Standard & Poor’s website.

“The terms are great. But you’re still betting on a very volatile asset class. There’s a little protection I guess. But what scares me is that oil is not just a matter of supply and demand anymore. Right now it’s the speculators, traders and derivatives players that are driving the market.”

Risk/reward

“The 15% return is really nice. But still, you’re running the risk of being long oil in a bear market. If it’s down at the end and if it hits the barrier, you’re not going to collect anything. You’ll wind up being long the index and losing 15% or more likely more.”

With a different underlier, “something a little bit more stable” or with a different view – “If I was more confident that oil has hit bottom,” the terms of the notes would be very attractive, he said.

“We’re getting notices from all over about new deals on oil. They find volatility here and they’re using it. It might be a nice play if you’re comfortable taking the downside risk for a nice return. But you still have this potential exposure to the commodity because it’s easy to hit the 15% barrier.

“It’s also called quarterly so you might just be called away in three months. You get your 3.75% coupon, it’s a nice return on an annualized basis but you’re still subjecting yourself to unlimited downside risk.”

Observation round

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that regardless of the attractive pricing, the speculative nature of the investment would not make the notes a good fit for his clients.

“We are watching very closely the oil commodity space with recent volatility in mind and we understand the geopolitical concerns behind oil prices,” he said.

“We’re continuing to observe it but we’re not necessarily taking a position in it until we feel there is a stabilization point in that sector.

Speculative

“Although the price of oil has come down substantially and people may argue it can’t drop any further, from my perspective, we’re not speculators and we wouldn’t be a player in this space until we saw stability in this commodity.”

The short duration of the notes added to the difficulty of predicting price movements.

“If it was a five-year, we might have a different opinion.”

Even in the equity asset class, the oil sector remains unsettling.

“We know that there are many oil stocks that are trading below book. I do think there is good value there.

“But the way we manage money for our clients does not allow speculation.

“In the oil space, if we still rely on OPEC products, that’s the kind of geopolitical risk we’re concerned about.

“It comes back to the old question – how do you make money? If you’re speculating, this is a great opportunity. But we’re not a speculator-type of manager.”

The notes (Cusip: 48127D3T3) will price on Friday.

J.P. Morgan Securities LLC is the agent with Morgan Stanley Smith Barney LLC as distributor.

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