JPMorgan, Citi to price target return notes on Euro Stoxx 50 amid renewed interest in euro zone

By Emma Trincal

New York, April 28 – JPMorgan and Citigroup each announced an issue of five-year notes linked to the euro zone equity benchmark as the bid for European equities resumed following Sunday’s French Elections, whose outcome provided some relief to the markets. The upcoming issues present different structures although both offer a target return, according to separate 424B2 filings with the Securities and Exchange Commission.

Two deals

JPMorgan Chase Financial Co. LLC will price contingent coupon autocallable notes due May 6, 2022 linked to the Euro Stoxx 50 index. The contingent coupon of 11.5% per annum is paid if the index is at or above its 85% coupon barrier on the quarterly review date. After six months, the notes will be called at par if the index closes at or above its initial level on the review date. The barrier at maturity will be set at 74% to 76% of the initial level.

The second offering is a barrier digital note with uncapped upside appreciation above a fixed return.

Citigroup Global Markets Holdings Inc. will issue 0% enhanced barrier digital plus securities due June 1, 2022 linked to the Euro Stoxx 50 index. If the index finishes at or above its 80% barrier level, the payout at maturity will be par plus the greater of any gain and the fixed return of 35% to 37%. Otherwise, investors will be fully exposed to any losses.

Steve Doucette, financial adviser at Proctor Financial expressed a stronger interest in JPMorgan’s autocallables.

Term, call

“It’s a long maturity. But chances are you’re going to get called very quickly,” he said.

“With the other one, you’re tied up for five years.”

The return as well as the possibility of outperforming the underlying also led him to prefer the autocallables.

“It’s an 11.5% yield. That’s equity return,” he said. “You’re collecting that coupon for a while if you’re lucky.”

One obstacle was the call, which may occur as early as Nov. 2.

“I’d push that call out to at least a year. That way you collect the full 11.5% coupon.”

While the difference in size between the two barriers was small, Doucette said he preferred the 25% contingent protection offered by JPMorgan.

“It’s a larger barrier than 20%. I’m more comfortable with 25% on an autocallable than 20% on a non-autocallable deal.”

Alpha

Doucette uses structured notes to generate excess return over the benchmark. While the fixed return offered by the Citigroup notes was attractive, it was not high enough.

“You need a range bound view. It’s great if the index is negative. But it’s almost a bearish note,” he said.

Investors can outperform the market if the index decreases by less than 20% or appreciates by less than 35%.

Over five years, Doucette said that the “window” to outperform remained narrow.

“You’re looking at a five-year lock up where you can either be long the index or make 35%. Over five years, that’s 7% a year.

“It doesn’t seem very attractive to me.”

The autocallable notes in his view offered a greater probability of earning a higher return.

“I’m biased toward autocalls in general. For this one, the odds are good that you collect 11.5% and you might get called,” he said.

“If you’re not called, at least you have this 25% barrier, which may or may not be enough...probably enough over five years. But even if the market is down 30%, you’ve collected 11.5% a year. It’s a pretty good way to offset your loss.

“I just think it’s a little bit more flexible.”

No cap

Matt Medeiros, president and chief executive of the Institute for Wealth Management, held the opposite view, which reflected his disinclination to use autocallables in his portfolio. He said he preferred the Citigroup notes.

“I like the fact that you get a minimum coupon, in particular if the index is down 20% or less,” he said.

“Getting a coupon based on an equity underlying is attractive in a rising rate environment.”

In addition, the uncapped return above the minimum coupon matched his bullish view on Europe.

“I think the Euro Stoxx presents good value. Conceptually I like the idea of having a coupon plus the index with no cap,” he said.

“And since I like the asset class and that it’s a five-year, on a point-to-point I get a better upside without the risk of being called.”

Point-to-point

Medeiros prefers to avoid autocallable structures in general. The JPMorgan notes have a “high probability” of being called, he said.

Autocallables can end up being expensive when the proceeds have to be reinvested over frequent cycles.

In addition, the early exit put investors at risk of not finding an equivalent return or risk-profile, as stated in the prospectus. But Medeiros stated another reason for disliking this structure type.

“I don’t like autocalls,” he said. “It’s not just the reinvestment risk. It’s mostly from a risk budgeting standpoint. If I’m trying to make long-term decisions, I’m plotting that out over a longer period. If it gets called before my expectation, I have to recalculate my model. This is something I’m not comfortable with.”

For the JPMorgan Chase Financial deal, J.P. Morgan Securities LLC is the agent.

JPMorgan Chase & Co. is the guarantor.

The notes will price on May 2 and settle on May 5.

The Cusip number is 46646QRP2.

Citigroup Global Markets Inc. is the underwriter of the second offering.

The notes will price on May 26 and will be guaranteed by Citigroup Inc.

The Cusip number is 17324CJ49.

© 2015 Prospect News.
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