JPMorgan's $46.92 million autocallable notes tied to GE drew strong bid for contingent income

By Emma Trincal

New York, May 9 - JPMorgan Chase & Co.'s $46.92 million of contingent income autocallable securities due May 2, 2013 linked to the common stock of General Electric Co. appealed to investors as an income opportunity in a low-interest-rate environment, sources said. It was last week's largest deal, according to data compiled by Prospect News.

If GE stock closes at or above 80% of the initial share price on a quarterly determination date, investors will receive a 2.1675% contingent payment, according to a 424B2 filing with the Securities and Exchange Commission.

If the stock closes at or above the initial share price on any of the first three quarterly determination dates, the notes will be redeemed at par plus the contingent payment.

If the notes are not called and the stock finishes at or above the downside threshold level, the payout at maturity will be par plus the contingent payment. Otherwise, the payout will be a number of General Electric shares equal to par of $10 divided by the initial share price or, at the issuer's option, an amount in cash equal to the value of those shares.

Contingent return

"There are different ways to structure these kinds of deals," a market participant said.

"In some, you get the coupon no matter what. In others, you only get the coupon when you get called.

"What's new compared to structures seen about a year ago is that this one adds one more condition. You can get a coupon if you're above the 80% threshold."

The contingent coupon of 2.1675% per quarter, which could theoretically yield a 8.67% return per year, was the main appeal of the deal, he said.

"It's an income structure. People who looked at it compared it with a fixed-income instrument," he said.

"You're monetizing a little bit more at above the 80% barrier.

"The trade-off of course is that if GE rallies like crazy, you've sold the upside, you're not going to get more."

He added that "it's only a contingent coupon," but " the contingency allows you to give a higher headline coupon."

Distribution, diversification

J.P. Morgan Securities LLC was the underwriter, and Morgan Stanley Smith Barney LLC handled distribution.

"There are some concerns around the credit of Morgan Stanley," the market participant said.

"Normally they place their own paper, but they may have had investors looking at diversifying their holdings.

"Morgan Stanley has a pretty good distribution network. The combination of this distribution and getting exposure to another credit is probably why it was a popular offering."

Not so defensive

A sellsider said that as an alternative to money market rates or Treasury yields, the perspective of getting about 8.5% on an annualized basis must have been appealing to income-seekers.

"General Electric is not extremely volatile," he said.

"They were able to offer this coupon by making it conditional. Without the contingency, the coupon would have been lower."

He said that it is difficult to evaluate the 80% downside barrier but that based on General Electric's recent stock price moves, "it's not so conservative."

With the stock at about $19 currently, the breach of the barrier would be a decline of the stock price below $15, he said.

"The last time it was below $15 was in December, four months ago. It might seem like a solid barrier, but it's not so. These barriers tend to be hit more often in this market. It's in part a result of globalization: people are reacting at the same time to the news," he said.

The stock itself helped the heavy bid on the notes.

"It's a very well-known name," the sellsider said.

In addition to that, investors are still bullish on U.S. equity.

"The U.S. market has outperformed everything else," he said, noting that the S&P 500 is up 8% year to date while the Euro Stoxx 50 index is down 4%.

"You also had the perception that the barrier was safe. But my personal feeling is that it's not as safe as it appears to be," he said.

The Cusip number is 46637G769.

The fees were 1.5%.

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