Deals based on S&P, Stoxx, Nikkei basket show popularity

By LLuvia Mares

New York, Dec. 12 - Leveraged return notes linked to index baskets have been in high demand recently, according to Tim Mortimer, managing director at Future Value Consultants.

Mortimer said the structure's increasing popularity may be due to pricing considerations and asset allocation.

"From what we have been looking at, the most common baskets are linked to S&P, Euro Stoxx 50 and Nikkei indices," he said. "For some reason that seems to be the most popular choice, a combination of pricing consideration and asset allocation, not including the United Kingdom."

In one example of the structure, on Nov. 29 Merrill Lynch & Co., Inc. priced $14.25 million included 0% leveraged index return notes due April 6, 2010 linked to a basket of those indexes, equal weights of the S&P 500, Dow Jones Euro Stoxx 50 and Nikkei 225.

The payout at maturity will be based on the basket performance over the term of the notes. If the basket value has increased, investors will receive par plus 104.61% of the basket gain. If the basket value has decreased by 10% or less, investors will collect par. If the basket value declines by more than 10%, investors will share in losses in excess of 10%.

Merrill Lynch & Co. is the underwriter.

JPMorgan prices annual review notes

In a deal drawing on two of the same indexes but using a different structure, JPMorgan Chase & Co. priced lesser index annual review notes linked to the Euro Stoxx 50 and Nikkei 225 indexes.

The 0% notes due Jan. 6, 2011 are expected to price Dec. 14 and settle Dec. 19.

The notes will be called at increasing premiums if both index levels are at least 90% of their initial levels on the first review date and at or above their initial index levels on the second or third annual review dates. The redemption amount will be par plus at least 17.8% if the notes are called on Jan. 2, 2009, par plus at least 35.6% if called on Jan. 4, 2010 and par plus at least 53.4% if called on Jan. 3, 2011. The exact call premiums will be determined at pricing.

If the notes are not called, the payout at maturity will be par unless one or both indexes decline by more than 10%. Investors will lose 1.1111% for every 1% decline in the lesser-performing index beyond 10%.

J.P. Morgan Securities Inc. will be the agent.

JPMorgan plans notes linked to indexes

In a separate deal, JPMorgan Chase & Co. plans to price 0% notes due Jan. 5, 2009 linked to a weighted basket of three buffered return enhanced components.

The basket includes the Dow Jones Euro Stoxx 50 index with a 45% weight, the FTSE 100 index with a 30% weight and the Nikkei 225 index with a 25% weight.

The payout at maturity will be par plus the basket return, which will equal the sum of the weighted returns for the basket indexes.

If a basket index finishes above its initial level, its return will be double the gain, capped at a maximum return. If a basket index falls by 10% or less, its return will be zero. If a basket index falls by more than 10%, its return will be negative 1.1111 multiplied by the decline beyond 10%.

The maximum return will be at least 15.6% for the Euro Stoxx 50, at least 14.5% for the FTSE 100 and at least 19.4% for the Nikkei 225. The exact caps will be determined at pricing.

Based on the estimated maximum returns, the maximum payout at maturity would be $1,162.20 per $1,000 principal amount of notes.

The closing basket level will be the average of the closing levels on Dec. 18, Dec. 19, Dec. 22, Dec. 29 and Dec. 30 of 2008.

The notes are expected to price Dec. 14 and settle Dec. 19.

J.P. Morgan Securities Inc. will be the agent.

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