JPMorgan, Citi, Svensk offer three-to-one participation accelerated notes linked to S&P 500

By Kenneth Lim

Boston, May 28 - A number of accelerated notes linked to a bullish view on the S&P 500 index were launched on Wednesday, in line with a growing view that the U.S. equity markets may be near a bottom, an investment advisor said.

JPMorgan Chase & Co. launched a couple of notes, one a series of return enhanced securities and a dual-directional return enhanced product. AB Svensk Exportkredit, through Merrill Lynch & Co., Inc., as well as Citigroup Funding Inc. also announced accelerated return notes.

"Clearly there seems to be an increasing view that the U.S. stock markets could improve over the next year and a half," the advisor said.

JPMorgan links to S&P 500

JPMorgan plans to price zero-coupon dual-directional buffered enhanced return notes due June 22, 2009 linked to the S&P 500.

At maturity, if the index ends above its initial level, the notes will pay par of $1,000 plus double the index return, with a capped total return on the notes of at least 12.8%. The cap will be set at pricing.

If the index declines by up to 10%, investors will receive par plus the 1% for every 1% decline in the index. If the index falls by more than 10%, investors will lose 1.1111% of their principal for every 1% decline in the index.

JPMorgan also launched zero-coupon return enhanced notes due June 22, 2009 linked to the S&P 500.

The single-direction notes will pay par of $1,000 plus triple the index gain at maturity, with the maximum total return capped at 20.1%. Investors will lose 1% for every 1% decrease in the index.

Different strategies for notes

The two JPMorgan notes will attract different investors even though both appear to offer bullish strategies on the S&P 500, the advisor said.

"The first one [dual-directional notes] obviously it's a bit more of a neutral kind of position on the S&P 500," the advisor said. "The range at which you can make money shifts to the left...Basically you do better than the S&P 500 if it ends between minus 10% and 12.8%, which is about 22.8% points if you want to look at it that way. For the non dual-directional product you do better than the index if it's between 0% and 20.1%."

But the dual-directional notes could potentially cost investors more if they make the wrong bet, the advisor said.

"You stand to underperform the index once it breaks the buffer, but in the second one you'll never underperform the index," the advisor explained. "That's the trade-off."

"I'd say the dual-directional product is for investors who are more neutral on the S&P 500," the advisor said. "These are investors who think the index is still in an uncertain area, that it could just as easily go up or down. But what's important here is that they think the S&P 500 is going to be range-bound, that is it's not going to go below 90% or more than 12.8%. For the other product investors don't have to be so concerned about the S&P 500 being range bound, because even if it falls 20% I'm not doing worse than the market. But I do want it to go up and I don't want it to go up by too much."

Citigroup, Svensk also link to index

JPMorgan was not the only one launching accelerated notes linked to the S&P 500. In fact, the products by Citigroup and Svensk also had three-to-one participation rates.

The Citigroup stock market upturn notes are 1.25-year zero-coupon securities linked to the S&P 500.

The notes will pay par of $10 plus triple any index gain at maturity, capped at a total return of 16% to 19%. The cap will be determined at pricing. If the index ends lower than its initial level, investors will lose 1% for every 1% decline in the index.

Svensk also launched its zero-coupon accelerated return notes due August 2009 linked to the S&P 500.

At maturity, Svensk's notes will pay par of $10 plus triple any index gain, capped at a total return of 13% to 17%. The cap will be determined at pricing. If the index ends lower than its initial level, investors will lose 1% for every 1% decline in the index.

Notes have different caps

The investment advisor said it is not certain how the different return caps on the notes by the three issuers will affect their uptake among investors.

"Where they set the cap is related to a number of factors," the advisor said. "One is when they price it, because the assumptions on volatility and so on are always changing. The other is the credit of the issuer, because investors are generally willing to take a lower yield in exchange for lower issuer risk. And I guess banks will also issue different terms simply depending on how much it costs them to create a product.

"It really depends on what you want as an investor," the advisor said. "If you want to keep the risk of an issuer default as low as possible, you might go with the product that has a lower cap even though that might not give you the best return. Sometimes if you're trying to limit your exposure, you don't have a choice. If I already have 20% of my portfolio with JPMorgan, just as an example, I might not want to buy more of their products even though they're very attractive. But if I like that product I could go to another bank and say, listen, can you do this for me?"

Sentiment improving in markets

The advisor said the bullish notes reflect a growing sense among investors that the U.S. equity markets could be improving.

"I don't want to say whether I personally think the market is improving or not," the advisor said. "But what I can say is that the U.S. markets have really taken a beating over the past year, and in such periods of decline you'll always find that at some point people will begin to wonder whether the worst is over. And in times like these I think you'll find that more people will begin to think that, yes, the worst is over."

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