JPMorgan latest to offer finance sector-linked products; Lehman, Barclays plan reverse notes tied to banks

By Kenneth Lim

Boston, March 10 - The wave of products linked to the financial sector continued to pour into the structured products market on Monday.

JPMorgan Chase & Co. announced plans for 13% reverse exchangeable notes due June 30, 2008 tied to the Financial Select Sector SPDR Fund and 0% semiannual review notes due March 19, 2010 linked to the S&P 500 Financials Index.

The SPDR-linked notes will return par at maturity unless the final index level is below the initial level and the index has closed below 80% of the initial level during the life of the notes. If the index finishes below the initial level and closed below the protection level during the life of the notes, the payout will be par of $1,000 divided by the initial share price.

The notes will price on March 26.

The $1,000 par semiannual review notes may be called on March 16, 2009, Sept. 16, 2009 and March 16, 2010 if the index closes above the initial index level on the review date. The payout will be at least 118.850% of par if called on the first review date, at least 128.275% if called on the second date and at least 137.700% if called on the final review date. The actual payout percentage will be set at pricing.

If the notes are not called, the payout will be par if the index is at least 90% of the initial level. If the notes are not called and the index finishes below the 90% buffer level, the investor will lose 1.1111% of the principal for every 1% that the index declines beyond 10%.

Those notes were expected to price Monday.

Tom Ricketts, president of securities and investment banking firm Incapital LLC, said the increase in banking-related offerings was a result of increased underlying activity among financial stocks. Incapital distributes structured products for JPMorgan.

"I think the only thing that you can take out of this is that when there's a sharp downward movement in any asset, that tends to lead to an upward spike in volatility and an upward spike in volatility can sometimes make the reverse convertibles more attractive," he said.

Reverse note structures are not necessarily the only ones that could benefit from a spike in underlying volatility, Ricketts added.

"To the extent you're a net seller of premium in any structure, the higher the volatility, the higher you'll receive for selling that premium," he said.

In today's markets, banks that offer structured products see many openings, he said.

"Typically when there's an upward spike in volatility, there's an opportunity for many products," Ricketts said. "We've seen demand across the board increase."

Lehman links to banks

Lehman Brothers Holdings Inc. on Monday also launched reverse exchangeable notes tied to a number of bank stocks.

Its reverse notes will pay par of $1,000 at maturity unless the underlying common stock closes below its initial level and has closed below a trigger level during the life of the notes. If the underlying common share price finishes below the initial level and the trigger event occurred, the payout will be the number of share equal to par divided by the initial share price.

The Lehman 16% reverse exchangeable notes tied to the common stock of JPMorgan has a trigger price of 75% of the initial share price. Its 15% reverse exchangeables tied to the common stock of Merrill Lynch & Co. Inc. has a trigger level at 70% of the initial share price.

Barclays links to Capital One

Barclays Bank plc, which was active a week ago with a slew of banking and finance sector-linked offerings, on Monday said it plans to price 15% reverse convertible notes tied to the common stock of Capital One Financial Corp.

The Barclays notes will pay par at maturity unless Capital One stock finishes below the initial level and closed below 60% of the initial level during the life of the notes. Otherwise the payout will be the number of Capital One shares equal to par divided by their initial stock price.

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