JPMorgan’s reverse exchangeables tied to energy stocks seen as short-term bullish play on oil

By Emma Trincal

New York, Oct. 21 – JPMorgan Chase & Co.’s 9% autocallable reverse exchangeable notes due May 1, 2017 linked to the least performing of four energy stocks were designed for investors bullish on oil over the short term, sources said.

The underlying stocks are Exxon Mobil Corp., Schlumberger NV, ConocoPhillips and Valero Energy Corp., according to an FWP filing with the Securities and Exchange Commission.

Interest is payable monthly.

The notes will be called at par if each stock closes at or above its initial share price on any quarterly review date other than the final review date.

If the notes are not called, the payout at maturity will be par unless the final share price of any stock is less than the trigger price, 55% of the initial share price, in which case the payout will be a number of shares of the least-performing stock equal to $1,000 divided by the initial share price of that stock.

Oil bet

“It’s a play on oil,” said a sellsider.

“Eighteen-month may be a bit short. A longer term would have been better. I think it will take more time for the industry to turn around.

“But the 9% coupon is attractive. You’re getting a decent return for a 55% barrier and JPMorgan’s credit.

“It’s rather interesting.”

A market participant was more cautious.

“They give you a generous barrier, but they have to because on the surface these stocks are correlated, they’re all in the same energy sector, but they’re not exactly the same. You have refiners, oil producers, and there is Exxon that’s doing everything,” the market participant said.

The original feature of this worst-of structure is that the risk is increased through the use of a multi-asset underlying while the chances of breaching the barrier are decreased by lumping together stocks of the same sector.

Caution

“Worst-of [notes] are a little bit tricky. You always have to look at correlation,” he said.

“If you see four stocks in the energy sector, you might say it’s all the same.

“Investors think that by being exposed to highly correlated stocks they limit the risk, but they overlook event risk.

“Each company has its own idiosyncrasy. Anything can happen.

“Look at Valent. The stock got killed today after reports of questionable accounting. It was the darling of the biopharma industry. And it just crashed.”

Valeant Pharmaceuticals International Inc.’s share price dropped nearly 40% on Wednesday after short-seller Citron Research accused the company in a report of using irregular accounting practices.

Event risk

“I’m not saying any of these four energy stocks would necessarily be exposed to something illegal, but anything can move a stock. One stock is down and you get exposed to the worst of the batch,” he said.

“You have to look at event risk.

“Investors buying this product are probably interested to jump in the sector after the big sell-off. Whether or not we’re out of the woods in the oil sector is another story.”

A buysider was very skeptical.

“You can call the bottom: it’s a great trade. If not, thanks for playing.”

J.P. Morgan Securities LLC is the agent.

The notes will price Monday and settle Oct. 29.

The Cusip number is 46625HNW6.

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