JPMorgan’s $1 million autocalls on ARK Innovation offer high yield, deep discount

By Emma Trincal

New York, Jan. 26 – JPMorgan Chase Financial Co. LLC’s $1 million of autocallable contingent interest notes due July 19, 2023 linked to the ARK Innovation ETF offer close to 20% in annualized contingent coupon over a fund going through a rough sell-off.

The notes will pay a contingent monthly coupon of 19.75% per annum if the ETF closes at or above its 70% coupon barrier level on the determination date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the ETF closes at or above its initial share price on any monthly call observation date other than the first, second and final review dates.

The payout at maturity will be par unless the ETF finishes below 70% of its initial share price, in which case investors will be exposed to the ETF’s decline from its initial share price.

Bargain

“It’s not bad,” a buysider said.

“The price has already dropped 57% from its high and you get close to 20% in yield.”

The ETF hit a 52-week high on Feb. 16 at $159.70 and closed at $69.03 on Wednesday.

“That’s not a conservative play. But it makes sense for a more aggressive adviser because you’re buying it at a depressed price,” the buysider said.

ARK Innovation, which invests in “disruptive technologies,” (Tesla is its largest holding) used to be a very popular fund. It returned 157% during the first year of the pandemic.

The ETF closed at $80.24 when the deal priced on Jan. 14. At 50% off its February high, its price was still heavily depressed when the issuer struck the notes.

“You already have this big discount from the peak, and you are getting an additional 30% protection. There’s a solid cushion built into this note,” he said.

Call protection

This buysider however objected to the call structure.

“The only thing I don’t like is the three-month no-call on the monthly observations. It’s too short,” he said.

“It’s true that 18-month is short too. But you can always do a 12-month no call on an 18-month. It takes away from the terms if you extend the no-call period. You have to lower the yield. But I would rather do that and get longer call protection.”

The 19.75% contingent coupon was high enough to provide some flexibility, he added.

Same day, different deal

JPMorgan Chase Financial priced a very similar issue for $4.23 million linked to this ETF on the same trade date.

The autocallable contingent interest notes due Oct. 19, 2023 will pay a lower contingent monthly coupon of 10.45% per year. The 70% coupon barrier remained the same, but the 50% principal repayment barrier offered additional protection.

The terms for the automatic call were identical to the first deal.

“This second one is not as attractive,” the buysider said.

“You don’t need the 50% protection at maturity. Given the depressed share price, it’s too much downside protection at the expense of your yield nearly cut in half.”

50% on both sides

A market participant compared the deals. His objections to both related to the barrier levels.

“It’s an interesting play for folks who have conviction in disruptive technologies. It falls into that tactical, opportunistic camp,” he said.

“The reasoning behind both notes is that selling is overdone. I have a chance to make significant headway. I don’t believe the stock is going to go down 30% from here,” he added, commenting on the first offering with the coupon and downside barriers set at 70%.

“But for these tactical trades, clients are pushing for more protection than 30%. The 30% barrier is a little bit too thin in my view.”

Getting paid

The coupon barrier was not satisfying in the second deal, he noted.

“I don’t like it either. I’d like to see 50/50. A 50% barrier for the coupon and 50% for the principal,” he said.

“These are not guaranteed coupons. Your coupon is at risk and 30% is not enough. You could easily miss the next two coupons. On a short-dated note, it’s a concern.

“Notes on some high-flying names like Peloton, Zoom are not paying any coupon at this point. These are down, way down.”

Zoom Video Communications Inc. is trading 69% off its February 2021 peak. Peloton Interactive, Inc. has dropped 84.4% from its 52-week high of a year ago.

The case of Ark Innovation, a diversified and actively managed ETF, was a little different, he said.

“I’m less concerned about a principal barrier breach than about not earning the coupon,” he said.

“If you buy an income note it’s to get that periodic income. If the periodic income doesn’t occur, that’s a problem.”

Both notes are guaranteed by JPMorgan Chase & Co. with J.P. Morgan Securities LLC acting as the agent.

The Cusip number for the $1 million deal is 48133CPX4. The fee is 0.4%.

The Cusip for the $4.23 million issue is 48133CNT5. The fee is 2.225%.

Both notes settled on Jan. 20.

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