JPMorgan’s trigger autocall on SPDR Bank ETF, Stoxx Banks show intriguing sector play

By Emma Trincal

New York, Jan. 24 – JPMorgan Chase Financial Co. LLC’s trigger autocallable notes due Jan. 28, 2021 linked to the lesser performing of the SPDR S&P Bank exchange-traded fund and the Euro Stoxx Banks index offer investors a play on the banking sector across two different continents. This in turn allows the issuer to price the deal attractively, sources said.

The notes are guaranteed by JPMorgan Chase & Co., according to a 424B2 filing with the Securities and Exchange Commission.

Each quarter, the notes will pay a contingent coupon at an annualized rate of at least 8.5% if each asset closes at or above the coupon barrier, 65% of the initial level, on the observation date for that quarter.

The notes will be automatically called at par of $10 if each asset closes at or above the initial level on any quarterly observation date after six months.

If the notes are not called and the final level of each asset is greater than or equal to the 65% downside threshold, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% decline of the lesser performing asset.

Smart deal

“I like this deal. The correlation between the two is pretty low simply because Europe and the U.S. are in different phases of the interest rate cycle,” said a market participant.

The coefficient of correlation between the SPDR S&P Bank ETF and the Euro Stoxx Banks index is 0.4.

“I like it because you’re playing the same sector but across different regions. The differences between the U.S. and Europe give you two fairly uncorrelated assets,” he said.

And yet, correlation would increase in a market downturn, he noted.

“If there is a crisis for large banks, it means it’s a world crisis. Both indices would probably go down as far as the barrier.”

In other words, in a negative economic scenario, the risk associated with the low correlation between the two assets would be somewhat muted.

“It’s intriguing. You gain value from the low correlation in terms of the higher coupon and the low barrier.

“You’re playing low correlation, which gives you better terms even though correlation would increase massively in a crisis.

“It’s a smart deal.”

A bit long

The terms of the deal were attractive, agreed an industry source.

“It’s not a bad piece of paper. A 35% barrier seems quite good especially with the market run-up.

But the tenor was more of a concern.

“The three-year is a little bit spooky. People are bullish for a shorter term than three years.

“If the [European Central Bank] starts to tighten or let their balance sheet run off, it may create a difficult environment for equities.”

In the U.S., economic growth has strengthened and seems to gain momentum. But within the next three years, the yield curve has enough time to flatten, or worse, to become inverted, he said.

“These wouldn’t be good news for equities.”

Overall, this source said he liked the comfort level provided by the barrier. The coupon barrier enhances the chances of getting paid. At maturity, it affords a reasonable amount of protection for investors.

“My only concern is the term. Three years might be longer than what I would feel comfortable with,” he said.

UBS Financial Services, Inc. is the agent.

The notes will settle on Friday.

The Cusip number is 48129K258.

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