JPMorgan plans several annual review notes linked to individual stocks

By Sheri Kasprzak

New York, Feb. 4 - JPMorgan Chase & Co.'s planned offerings of a few annual review notes linked to individual stocks got some market insiders talking Monday.

More than one insider suggested that investors may just be more familiar with individual stocks than the index to which these notes are often linked.

"Annual review notes, also called auto-callables, have indeed increased in popularity," said Serge Troyanovsky in an interview Monday with Prospect News.

"Traditionally, these notes have been done with broad indices, such as S&P 500, DJ EuroStoxx 50 or Nikkei 225, or in many cases with baskets of indices. However, in order to generate higher returns, investors moved on to single stocks. In addition, many investors feel that they understand single stocks better and are often more comfortable assuming risks associated with single stocks."

Another market insider agreed that investors may have more comfort with an individual stock.

Investors may want stocks

"Investors may just prefer to look at single stocks rather than an index," he said.

"There's name familiarity, for one. Lots of investors have tracked and know companies like AT&T. Maybe some investors don't follow the S&P 500. Those investors may still want the benefits of the annual review notes without having an index as the underlyer."

Annual review notes provide a higher coupon, and those notes linked to single stocks have another advantage, Troyanovsky pointed out.

"If the market declines in excess of any protection barrier build in the structure, investors have a potential downside exposure, meaning possible loss of principal," he said.

"Auto-callables linked to single stocks (or baskets of stocks) have a physical redemption feature, whereby investors are delivered a pre-determined number of the underlying shares. Many investors prefer to receive a physical delivery of the shares and choose afterwards whether to continue holding them. In cases of auto-callables linked to indices, the redemption is typically in cash, meaning that investors are automatically faced with a loss."

Troyanovsky noted that annual review notes are beginning to be linked to "the most recognized single stock names."

JPMorgan's annual review notes

The zero-coupon annual review notes JPMorgan is offering are linked individually to the stocks of Toll Brothers, Inc.; AT&T Inc.; Bank of America Corp.; and Apple, Inc.

The notes will be called at increasing premiums if the stock price is at or above the trigger price on one of three annual review dates. The trigger price will be the stock's initial price.

The redemption amount for the Toll Brothers-linked notes will be par plus at least 22.6% if the notes are called on March 6, 2009; par plus at least 45.2% if called Feb. 22, 2010; and par plus at least 67.8% if called Feb. 22, 2011, according to a filing Monday with the Securities and Exchange Commission. The exact redemption amounts will be determined at pricing.

The redemption amount on the AT&T-linked notes will be par plus at least 18% if called on March 6, 2009; par plus at least 36% if called Feb. 22, 2010; and par plus at least 54% if called Feb. 22, 2011.

The redemption amounts for the Bank of America-linked notes will be par plus at least 18% if called on March 6, 2009; par plus at least 36% if called on Feb. 22, 2010; and par plus 54% if called on Feb. 22, 2011.

The redemption amounts for the Apple-linked notes will be par plus 23.7% if the notes are called on March 6, 2009; par plus 47.7% if called on Feb. 22, 2010; and par plus 71.1% if called on Feb. 22, 2011.

If any of the notes are not called, the payout at maturity will be par unless the index declines by more than 25% at any time during the life of the notes, in which case the investors receive a number of the respective shares equal to $1,000 divided by the initial share price.

All of the notes have a three-year term and are expected to price Feb. 22.

Goldman prices $298.9 million index-linked notes

Elsewhere Monday, the Goldman Sachs Group, Inc. announced the pricing of $298.9 million in 1.1% index-linked notes linked to the Russell 2000 Total Return index.

The two-year notes pay an amount equal to par times the index performance. The notes are not principal protected, so investors may lose all of their principal.

The initial index level is 3,053.314.

The notes pay 1.1% in interest on Feb. 5, 2009 and Feb. 5, 2010.

Citi's currencies-linked notes

In other news, Citigroup Funding, Inc. announced plans to price principal-protected notes linked to a basket of eight currencies.

The notes are linked to the Brazilian real, Russian ruble, Indian rupee, Chinese yuan, Japanese yen, Indonesian rupiah, Malaysian ringgit and Turkish lira, all versus the U.S. dollar.

The 18-month notes pay par plus a basket return amount, which may be positive or zero.

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