JPMorgan plans notes linked to least-performing common stock of banking firms

By Sheri Kasprzak

New York, Aug. 15 - JPMorgan Chase & Co. led structured products news on Wednesday with its plans to price reverse exchangeables linked to the least-performing stock of five banking firms.

Meanwhile, in the broader structured products market, serious drops in the stock market could make principal protection more appealing to investors, according to one market insider.

As another result of those troubles, structured products insiders said Wednesday that problems in the credit market may have spawned two offerings of notes linked to the least-performing stock of banks.

"With the credit worries that exist now, the structure makes sense," said one market insider. "These are stocks that have all been impacted in an adverse way. This is a good example of something done in response to a major event in a particular sector, in this case banking, instead of looking at just one reference stock and its performance or looking at just one index and its performance."

An analyst commented on Wednesday that drawing the stocks from the same sector also makes sense.

"You want stocks in a basket like this to be correlated," he said.

The notes come less than a month after Eksportfinans ASA announced plans to price an offering of worst-of reverse convertibles linked to a basket that includes Bear Stearns Cos. Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Lehman Brothers Inc. and Merrill Lynch & Co.

A market source added that it was no surprise JPMorgan would choose to exclude its own stock from its basket, which includes all of the banking stocks as the Eksportfinans notes except for its own, which it replaced with the stock of Morgan Stanley.

Notes pay 15% coupon

The notes include a 15% annualized coupon and have a six-month term. The notes pay par plus interest at maturity, unless a trigger event occurs before maturity and the cash value of the least-performing stock is less than the initial stock price. Should that happen, the investors will receive a number of the least-performing shares equal to $1,000 divided by the initial share price of that stock.

The protection price will be 50% of the initial share price.

The notes are not principal protected.

The Eksportfinans notes announced on July 25 pay par at maturity unless the stock falls below the 70% knock-in level during the life of the notes and unless any of the stocks in the basket finishes below the initial share price. Those notes also have a 15% coupon and have a one-year term.

Assuming either condition is met, the investors receive a number of shares of the worst-performing stock equal to $1,000 divided by the initial share price of the worst-performing stock.

Natixis Securities North America Inc. is the agent on that deal.

Stock performance

Of the stocks in the most recent basket, Bear Stearns' stock gave up 2.5%, or $2.64, to close at $103.36 Wednesday. That stock has traded between $103.36 on Aug. 15 and $116.89 on Aug. 7 so far this month.

Goldman's stock fell by $4.85, or 2.86%, to close at $164.90 Wednesday but has traded between $164.90 on Aug. 15 and $193.30 on Aug. 8.

On Wednesday, Lehman's stock dropped by $2.10, or 3.91%, to close at $51.57. The stock has so far this month ranged between $51.57 on Aug. 15 and $64.78 on Aug. 8.

Merrill's stock dropped by $2.40, or 3.36%, on Wednesday to settle at $68.94. The stock traded between $68.94 on Aug. 15 and $78.17 on Aug. 8.

Morgan Stanley's stock gave up 95 cents, or 1.65%, to close at $56.63 Wednesday. So far this August, the stock has traded between $56.63 on Aug. 15 and $65.39 on Aug. 8.

Principal-protection could be commodity

In the broader structured products market, a market insider said Wednesday that more investors may seek out principal protection.

"Most notes in the U.S. structured products market are not principal protected," said the market source. "That could change. With stocks as they are, there may be a bit more fear in the market, I feel."

JPMorgan's 39% reverse exchangeables

Elsewhere, JPMorgan Chase priced a $3.229 million offering of 39% reverse exchangeable notes linked to the least-performing in the Dow Jones Industrial Average.

The one-year notes pay par unless any stock in the Dow Industrials, excepting JPMorgan's own stock, falls by more than 30% during the life of the notes. If that should happen, the notes pay a number of shares of the least-performing stock equal to $1,000 divided by the initial share price of the least-performing stock.

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