JPMorgan' $629,000 leveraged notes tied to General Motors draw attention for stock underlying

By Emma Trincal

New York, Aug. 24 - JPMorgan Chase & Co.'s recent $629,000 issue of 0% return enhanced notes due Sept. 6, 2012 linked to the common stock of General Motors Co. is intriguing, sources said, because it is rare to see enhanced return products linked to a stock. Those structures for the most part use indexes or baskets of indexes.

"It's original," a market participant said.

The final share price will be the average of the closing prices of General Motors stock on the five trading days ending Aug. 31, 2012, according to a 424B2 filing with the Securities and Exchange Commission.

If the final share price is greater than the strike price, the payout at maturity will be par plus double the stock return, up to a maximum return of 34.5%. Investors will lose 1% for every 1% drop beyond the strike price.

The deal priced Friday with a $22.86 strike price, which is slightly higher than the $22.16 closing price of the stock.

Unusual

"I've not seen any leveraged single-stock deals," said David Fitzsimmons, managing director, equity derivatives at Huntington Bank.

"It was probably one guy with that size.

"We wouldn't see these kinds of deals anyhow because our clients place a premium on capital preservation. They're transitioning towards lower-risk assets in this volatile environment."

Data compiled by Prospect News shows that single-stock deals employing a leveraged structure are the exception, not the rule.

Among the 333 leveraged deals without downside protection that have priced so far this year, only six were linked to a single stock, for instance Barrick Gold Corp., Apple Inc. or Citigroup Inc.

Moreover, those deals were for the most part below the $4 million mark, and none exceeded $10 million.

Among the 494 leveraged notes that include a buffer, only one deal was linked to a stock.

Leveraged notes as a whole are normally based on an equity index, a single commodity or a basket of currencies, exchange-traded funds or commodities, according to data compiled by Prospect News.

The common stock of General Motors began trading in November. Since then, agents have priced 10 offerings based on the name for a total of $39 million, according to Prospect News data.

Last week's deal was the first time a note employing leverage was tied to this stock. All other General Motors-based deals have been knock-out notes or reverse convertibles.

Index, leverage

"Most structures with leverage typically use indexes rather than stocks," the market participant said.

"Single-stock people go with very traditional structures like reverse convertibles with a pure coupon versus downside protection.

"It could be because people who buy stocks are not the types to buy structured products. But they understand reverse convertibles. It's an easy transition from just buying the stock.

"If the downside protection gets breached, you're delivered the stock. It's an alternative to owning the stock, and my guess is that stock deals are sold as reverse convertibles because it's easier to approach the buyer that way."

Another reason for not using leverage with notes linked to one stock, he said, lies in the way investors purchase stocks.

"Maybe you can put margin financing on a stock, in which case, you get implied leverage," he said. "It makes the use of leverage via a note less relevant."

However, according to this source, leveraged notes based on a single stock can be seen outside of the United States.

"We see a lot of single stocks offshore," he said.

"But in the U.S., when it comes to stocks, you usually don't get the leverage."

For a bull

The notes were designed for an investor bullish on General Motors, Fitzsimmons said.

"I wouldn't see a broad demand for that simply because in the current environment, our clients are seeking safety. But if you have a strong bullish outlook on General Motors, if you believe it's a good entry point, then it probably makes sense," he said.

"We just don't see buyers willing to take such a strong view.

"But maybe it was a small part of a portfolio allocation."

The market participant said that "it's for someone bullish on the stock."

"I wouldn't buy that," he said "because if you're really bullish, you don't want the cap and you might want to own the stock directly.

"However, there are no bad ideas if you have a need and if the product fits your need.

"The trade here is you give up the upside, but you get to the cap faster with leverage. Plus you get a better tax treatment than owning the stock."

According to the prospectus, profits on the notes may be treated as long-term capital gains because the notes are held for just a little bit more than one year.

Fees for the deal were 1%.

J.P. Morgan Securities LLC was the agent.

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