S&P 500-linked notes flood structured products marketplace

By Sheri Kasprzak

New York, Aug. 6 - A market correction may be at the core of a recent influx of S&P 500-linked offerings from several different investment banks, according to one market analyst.

Tim Mortimer of Future Value Consultants, a London-based company that analyzes derivatives products, said following the credit shock a couple of weeks ago gave banks an opportunity to price such a structure.

"There's a bit of correction," Mortimer said in an interview Monday. "It takes a couple of weeks for that to happen. Once people hear about what other banks are doing, everyone else thinks they have to do the same, even if there's not a strong case for it."

Mortimer said the default choice in the U.S. structured products marketplace for mainstream equity is the S&P 500.

Mortimer also noted that an increase in volatility benefits the structure.

"You can achieve a better rate than you would a few weeks ago," he said. "And you're striking at a lower level, which is probably another driver."

JPMorgan, Barclays plan S&P deals

Looking to specific offerings, JPMorgan Chase & Co. and Barclays Bank plc are among the investment banks with S&P 500-linked annual review notes.

All of the zero-coupon notes have a three-year term and may be called at increasing premiums if the index level is at or above its initial level on one of three annual review dates.

Under the terms of one of the JPMorgan notes, the redemption amount will be par plus 11.65% if the notes are called on Aug. 15, 2008; par plus at least 23.3% if called Aug. 17, 2009; and par plus at least 34.95%, if called Aug. 16, 2010. The exact redemption amounts will be determined at pricing.

If the notes are not called, the payout will be par unless the index declines by more than 10%. The investors will lose 1.1111% for each 1% decline beyond 10%.

In the other JPMorgan zero-coupon annual review notes linked to the S&P 500, the notes will be called at increasing premiums if the index level is at or above 95% of the initial level on the first review date and above its initial level on the remaining two review dates.

The redemption amount will be par plus at least 10.95% if called Aug. 15, 2008; par plus at least 21.9% if called Aug. 17, 2009; and 32.85% if called Aug. 16, 2010.

Assuming the notes are not called, payout will be par unless the index declines by 10% or more. The investors will lose 1.1111% for every 1% decline beyond 10%.

In the Barclays annual review notes, the notes will be automatically called at increasing premiums if the index level is at or above 90% of the initial index level on the first review date and greater than or equal to the initial index level on any of the remaining two review dates.

The redemption amount will be par plus a premium of at least 10.05% if called Aug. 15, 2008; at least 20.1% if called Aug. 17, 2009; and 30.15% if called Aug. 16, 2010.

If the notes are not called, payout at maturity will be par if the ending index level is at least 90% of the initial index level. Investors lose 1.1111% for each 1% drop beyond 10%.

Morgan Stanley's outperformance notes

In other structured products news, Morgan Stanley announced plans to price outperformance securities linked to the performance of the Nasdaq 100 index relative to the S&P 500 index.

The notes, according to Mortimer, are assuming further growth among tech stocks.

"More important, even if there is an overall bear market and the Nasdaq outperforms the S&P on the way down, you still make money," Mortimer noted.

The 13-month notes pay triple the difference in the performance, capped at between 121% and 122.5%, assuming the Nasdaq 100 outperforms the S&P 500.

If the Nasdaq 100 underperforms the S&P 500, investors will share in losses determined according to triple the underperformance amount.

There is a floor of $5,000 per $10,000 security.

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