JPMorgan’s uncapped notes with contingent downside digital payout linked to Dow aimed at bears

By Emma Trincal

New York, July 22 – JPMorgan Chase & Co.’s 0% uncapped contingent buffered return enhanced notes with a downside digital return due July 29, 2020 linked to the Dow Jones industrial average offer an unusual payout for bears, but the marketing of the notes, if designed for more than one investor, may not be easy, sources said.

The payout at maturity will be par plus at least 1.05 times any index gain, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive a fixed return equal to 15% if the index falls by up to 30% and will be fully exposed to any losses if the index falls by more than the 30% contingent buffer.

Atypical

“It’s different. I haven’t seen it before,” a sellsider said.

“It’s not your usual digital note, but it’s still a digital,” a market participant said.

“They pay you a lump sum coupon at the end if the index is above a certain threshold. In this case, it’s a range. You have a downside barrier of 70% and an upside barrier of 100%. You get the digital payout if the index is between those two levels.”

The note is designed to appeal to only bears in his view: “What happens on the upside is almost irrelevant. You have a very small leverage factor, almost nothing.

“What’s interesting is the downside with this double barrier.”

The market view expressed by the product is the novelty, not the structure itself, in his view.

Bulls need not apply

“It’s a 15% digital that’s applied to the downside. The technology is not new. It’s a digital note,” he said.

“It’s the selling point that’s new. Who wants to buy that? To say ‘I believe that five years from now, the Dow Jones will be lower than it is today’ is a little strange. It’s an unusual view for a retail investor. With long-term bets on equity, people tend to be bullish. You can see tactical plays for a one- or two-year term with a slight bearish bias but not on a five-year.

“Structured products usually are for mildly bullish investors. This one is for mildly bearish investors.”

Bulls have not much to gain from the investment, he said.

“If the market is up, the whole 15% is out. Yes, you have unlimited upside, but what’s the point? You’ve missed the interest rate you would have received from buying a bond. There is no point holding a five-year note with such a small amount of leverage. You might as well be long the index and get the dividends.

“So you have to be bearish.”

The question is how bearish.

Down to a point

“You can’t be too bearish. If the index drops more than 30%, you lose. You have to be bearish in a 70% to 100% range. Call it mildly bearish if you want. The point is the index can’t go down too much,” he said.

“What is really strange here is that usually people will bet on an upside range. The market for instance would have to be up to a certain level for you to get the digital. This note expresses a rather unusual view of the market.”

The sellsider said he is not sure how to profile a potential investor.

“You’re sort of bearish and moderately bullish. I would say it’s a range-bound view,” he said.

“The best scenario is if it goes down, but you can’t be super bearish. That’s why I wouldn’t say it’s a bear note.

“It’s also not like a twin-win where you participate in the downside up to a cap. It’s a digital on the way down to the barrier level, and you participate only in the upside. It’s interesting.”

Because retail investors are so used to buying bullish or moderately bullish notes, he agreed that marketing the notes may be challenging unless the offering is the result of a reverse inquiry.

“I don’t know how they’re going to sell it. I mean I don’t know what their pitch is going to be,” he said.

“I guess you could say ... if it goes down, you make money as long as it doesn’t breach the barrier. If it goes up, you participate. Still, it’s quite atypical.”

J.P. Morgan Securities LLC is the agent.

The notes will price on Friday and settle on July 29.

The Cusip number is 48125UB92.

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