For a long-term play, JPMorgan’s uncapped buffered notes on S&P, Stoxx offer appealing terms

By Emma Trincal

New York, Feb. 13 – JPMorgan Chase Financial Co. LLC’s 0% uncapped buffered return enhanced notes due Feb. 17, 2028 linked to the lesser performing of the S&P 500 index and the Euro Stoxx 50 index showed an unusually long tenor for a plain-vanilla deal. But the quality of the terms, if one is willing to hold the notes for eight years, are also better than average, buysiders said.

If each index gains, the payout at maturity will be par plus at least 2.75 times the return of the lesser-performing index, according to a 424B2 filing with the Securities and Exchange Commission.

The exact leverage factor will be set at pricing.

If either index finishes flat or falls by up to 40% of its initial level, the payout will be par.

If either index falls by more than 40%, investors will lose 1% for every 1% that the lesser-performing index declines beyond the 40% buffer.

Asset allocation tool

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the product.

“This is a very appealing note. I’m not worried about the long maturity as it would fit in the portfolio of someone with a long-term, buy-and-hold bias, which tends to be our approach,” he said.

“I believe both of these indices are core components in an allocation portfolio.”

The 2.75 leverage factor was also unusually high, making the payout compelling, especially with no cap.

“Certainly, our projections don’t go out eight years but we’re anticipating low-single-digit returns, so the enhanced return is very attractive.”

Uncommon length

Leveraged buffered notes with eight-year maturities are rare unless the notes offer full principal-protection, according to data compiled by Prospect News.

So far this year, for instance, leveraged notes showed an average tenor of 2.75 years. This group includes full downside exposure, barrier notes and buffered notes.

For principal-protected notes, the average length is 6.25 years. Many of such notes however are tied to low-volatility indexes, a way for issuers to provide better pricing by limiting the upside potential without having to cap it.

Buffer, fee

For Medeiros, the duration of the product was not an issue.

“It could be a concern for some. It depends on the type of money manager you are. We like the idea of long-term holding in our core portfolio so this would fall in line with our approach,” he said.

“In addition, I’m very comfortable with the 40% buffer.”

The notes carry a 0.6% fee, according to the prospectus, which represents only 7.5 basis points per annum.

“We’ve seen fees coming down in the space,” he said.

“I’m pleased with that.

“This one is relatively inexpensive. But it’s a longer-term holding, so it makes sense. You would expect the fees to be lower than average.”

Terms

Steve Doucette, financial adviser at Proctor Financial, also appreciated the terms. But the long maturity was a concern for this adviser, who does not always hold his notes until maturity.

“I like the structure – 2.75 times leverage, no cap. A 40% buffer... That’s great. Problem is...If you wanted to get out early, would you get a reasonable pricing for it?”

When a structured note has gained value, Doucette likes to sell it early.

About 30% of his structured notes have been sold prior to maturity.

Pricing uncertainty

“Say the market is up for four years. The value of your note has appreciated. How much are you going to get for the 2.75 leverage?

“What’s going to be the price of your 2.75 times leverage. What’s the price of this option four years out? We don’t know.”

“You never get a clear answer...That’s the problem,” he said.

“The issuers are the only market-makers.

“You get into that Black-Scholes model and different parties are giving you different prices.

“I don’t like the long duration notes because of the pricing uncertainty.”

The Black-Scholes model is a mathematical model used for the pricing of options.

Buffer reset

Doucette likes to sell early in a bull market in order to re-adjust the downside protection level to the current index price.

“We get out early so we can reset the buffer. Depending on how volatile the market is, we’re willing to give up some of the upside to get more downside protection, so we renegotiate the terms.

“When you deal with issuers, you can get better prices on the sell and the buy as long as you roll over.

“But in general, pricing is pathetic. You can’t price it consistently across different platforms,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will settle on Tuesday.

The Cusip number is 48132H6V9.

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