Morgan Stanley, JPMorgan price single-name autocalls with buffers, a change from ordinary barriers

By Emma Trincal

New York, Feb. 24 – Morgan Stanley and JPMorgan priced autocallable note offerings in two separate $10 million deals with similar features, in particular a geared buffer on the downside, a notable difference from the all-pervading use of barriers on these products, sources noted.

Two deals

Morgan Stanley Finance LLC priced $10 million of buffered phoenix autocallable securities due Feb. 22, 2022 linked to Pinduoduo Inc.’s common stock, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent monthly coupon plus any previously unpaid coupons at an annual rate of 35.28% if the stock closes at or above the 80% coupon threshold on a monthly observation date.

If the shares close at or above the initial price on any monthly determination date other than the final one, the notes will be called at par.

The payout at maturity will be par unless the stock finishes below the 80% buffer level, in which case investors will lose 1.25% for each 1% stock decline beyond 20%.

Separately, JPMorgan Chase Financial Co. LLC priced $10 million of autocallable contingent interest notes linked to Qualcomm Inc. with the same maturity date, according to a 424B2 filing with the SEC. The structure was the same except for the coupon payable quarterly at a rate of 12.9% per year.

Single names

The downside protection offered by the 20% geared buffer was made possible by the use of single stocks, said a market participant.

“A 20% buffer for stocks is not the same as a 20% buffer for indices,” he said.

“You could never do that with an index. Or you’d do it with a 4% coupon.

“You have to look for stocks if you want decent returns.”

Price, coupon

The $10 million size was a “decent size” for autocallable notes, he said, although not unheard of.

“These are sizes that we’ve seen,” he said.

The 38.25% coupon did not overly impress him either.

“Usually on stocks, the average coupon is anywhere between 10% and 50% depending on the volatility and the barrier level,” he said.

He found that investors had diverse appetites for risk. While geared buffers are slightly riskier than traditional ones since the entire principal may be lost, he found that his clients did not object to the feature.

“I haven’t found that people are reluctant to invest in notes with geared buffers. It depends on investors’ appetite for risk. Not everyone is the same. You have investors ready to bet on a stock for $10 million. Others will do $100,000 with little to no risk.

“The good thing with structured products is you can offer tailor-made products.”

Buffers on income

Buffers on income products are not so common, said an industry source.

“It’s more prevalent in Europe. If you put a buffer on an autocall, it’s going to be a geared buffer. It’s got to be because it’s less expensive. A 20% normal buffer wouldn’t work,” he said.

The pricing of the two buffered autocall issues was a good thing, he said.

“It’s nice to see people using income notes with what looks like attractive terms,” he said.

“It shows how comfortable advisers feel with income products, how they’re trying to convey the concept to a variety of clients with different risk profiles.”

He noticed the size of the offerings.

“These are two good size deals. I don’t know if it’s the beginning of a new trend. You’re looking at two wirehouse reps using it,” he said about the use of a buffer for those products.

The average size of autocallable note offerings is $3.3 million, according to data compiled by Prospect News.

“I think investors are used to having barriers on income products. Personally, I may prefer a barrier with a deep protection. You’re likely to get a higher return. The gearing is a good compromise. You’re going half-way between a barrier and a traditional buffer from a pricing standpoint,” he said.

High volatility

But buffers make sense with single stocks, especially volatile ones.

Chinese internet stock Pinduoduo has an 80.86% implied volatility compared to 21.6% for the S&P 500 index. Qualcomm’s volatility at 38.88% is much lower. The gap in volatility explains the extreme divergence in coupon sizes, he noted.

“If you’re an adviser and your client holds Qualcomm, assuming this is a stock the client is familiar with and has some decent exposure to, you may think the sector had a big run up, perhaps I need to hedge some of this. At the same time, you’re getting paid a nice double-digit coupon,” he said.

Client

Both deals were distributed by JPMorgan.

This industry source said he had no idea if the client would be retail or institutional. The fee for both deals is 0.5%, according to the filings.

“It depends what you mean by institutional. If you’re a fiduciary, I wouldn’t categorize that as institutional but as retail. When I think institutional, I think asset manager or hedge fund,” he said.

The Morgan Stanley-issued notes linked to Pinduoduo are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent. J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA are the placement agents.

The notes settled on Friday.

The Cusip number is 61771VAE0.

The notes tied to Qualcomm are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The Cusip number is 48132R5S5.

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