JPMorgan's $29.97 million autocallables linked to S&P 500 offer yield enhancement, protection

By Emma Trincal

New York, Jan. 25 - JPMorgan Chase & Co. priced nearly $30 million of review notes linked to the S&P 500 index. It was the biggest deal of last week, a sign that investors are rediscovering the appeal of autocallable products, sources said.

The product was popular because it gives investors some potential yield enhancement even in a flat market along with partial downside protection, sources said.

JPMorgan priced $29.97 million of 0% review notes due Feb. 6, 2013 linked to the S&P 500.

The notes will be automatically called at par plus an annualized 12% premium if the index closes at or above the initial level on any of the quarterly review dates, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, investors will receive par for losses of up to 10% and will lose 1.1111% for every 1% drop in the index beyond the 10% buffer.

Quarterly review

"It's a nice structure, and you have a quarterly call option, which is good," a structurer said.

"There's negative leverage on the downside though. That's less attractive. I'm not a fan of leverage because a lot of clients just do not understand it.

"But it's a pretty fair structure."

One of the issues with autocallables is the reinvestment risk if the notes are automatically called early. In this case, investors have no guarantee that they will be able to reinvest the proceeds at a comparable rate, the prospectus warned.

And investors would only receive 3%, 6% or 9% rather than 12% if the notes were called on the first, second or third review date, respectively.

"It might not be long term, but if investors catch a window where the market is flat, they have an opportunity to outperform the index," the structurer said.

Flat is good

Another advantage making the deal popular, this structurer said, is that it allows mildly bullish investors to capture some yield while getting some protection on the downside. The structure is fairly straightforward, he explained.

"Investors don't really need the market to perform too much in order to earn a coupon," he said.

"In addition, you know when you're getting called. It's an automatic call, which eliminates a lot of the mystery you have with discretionary calls.

"That's one of the reasons those autocall[able notes] can be very successful."

A market participant said that he has seen more autocallable notes pricing lately.

"We've done similar structures recently. People were not doing this trade too much a year ago, but they've become more aware of those types of products," the market participant said.

"You'll see a lot more of those autocallables in the next couple of months.

"People like it. If you're mildly bullish, you get a good protection on the downside with a good yield potential."

J.P. Morgan Securities LLC is the agent.

The Cusip number is 48125VJY7.

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