JPMorgan’s $6.96 million notes tied to European Dividend Futures 2017 introduce dividend bets

By Emma Trincal

New York, July 2 – It was a small size, but some sources said JPMorgan Chase & Co. just priced an innovative product that brings access to dividend derivatives to structured note investors.

JPMorgan priced $6.96 million of 0% return notes due Dec. 20, 2017 linked to the European Dividend Futures 2017 (USD) index, according to an FWP filing with the Securities and Exchange Commission.

The index is not entirely new – it was created by Stoxx Ltd. in 2008 – but it’s the first use of this index in a registered structured note format, according to data compiled by Prospect News.

The payout at maturity will be par plus the index return times an adjustment factor of 101.2%, according to the prospectus.

The index

The index, developed by Solactive AG in coordination with J.P. Morgan Securities, aims to replicate the returns of a euro-denominated listed futures contract traded on the Eurex Exchange.

In June 2008 Eurex launched the Euro Stoxx 50 index dividend futures contracts. These are exchange-traded derivative contracts that let investors take a position on future dividends from the constituents of the Euro Stoxx 50 index. Each futures contract period is one year.

The index offers another benefit by attempting to mitigate exposure to currency risk in rebalancing weekly the fluctuations in the value of the euro relative to the dollar, according to the prospectus.

Dividend swaps

“It’s a relatively new index. I’m pretty sure it’s quite new as a structured note. In fact, I don’t think I’ve seen a note on this before,” a structurer said.

“However, the concept is not new. What they’re trying to do is to replicate the benefits of interest rate swaps and apply it to dividends. It’s quite interesting.”

In an interest rate swap, two sides take bets on the future direction of interest rates.

“One side pays a fixed interest rate, the other a floating interest rate. The side that gets paid with a floater wins if interest rates go up. The other side wins if they go down,” he explained.

“You can apply the same concept to dividends. Dividends are announced in the future. They’re not fixed.

“The same transaction applies. Two counterparties bet on dividends at a future date. There is an agreed-upon price. One sees dividends higher than the price, the other, lower.

“Dividend forwards or dividend swaps are just that: a bet on dividends. The structured notes reflect the economics of these futures. A buyer of the notes is going long the index. Whoever buys this product expects dividends to go up.”

Derivative versus stock

The structurer stressed one of the key benefits of dividend derivatives versus owning the stock outright.

“There’s a huge difference between that note and being long the stock, which in this case is the Euro Stoxx index,” he said.

The euro zone equity benchmark has a 3.45% dividend yield.

“When you buy the index, you get 3.5%. You also get the equity risk. Here, you only want dividends to rise. You’re not concerned with the ups and downs of the index.”

While mergers and acquisitions are not thriving in the euro zone as much as in the United States, some investors expect European companies to jump on the M&A bandwagon sooner or later, a market participant said.

“When there are a lot of buyouts and mergers, people expect higher dividends. Maybe it’s a play on that,” he said.

“It’s a small size deal. It could be an institutional investor, but I don’t think so. You’re probably dealing with a discretionary account within JPMorgan private bank. There are a lot of discretionary accounts there. Someone manages the allocations on a discretionary basis by sector, by theme. This is definitely a play on the dividend theme.”

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48125UXV9) priced June 26.

The fee is 1.5%

Separately, JPMorgan was set to price another note with identical terms – maturity date and adjustment factor – just ahead of the Fourth of July weekend. Those notes will settle on July 8. The Cusip number is 48125UYW6.

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