JPMorgan’s $89.88 million digital notes on the S&P 500 to fit neutral market outlook

By Emma Trincal

New York, May 18 – JPMorgan Chase Financial Co. LLC’s $89.88 million of 0% digital equity notes due Aug. 7, 2023 linked to the S&P 500 index drew a heavy bid last week due to the short tenor, buffered protection and double-digit return even in a negative market, an industry source said.

If the index finishes at or above 90% of initial level, the payout at maturity will be par plus 13.91%, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, investors will lose 1.11111% for every 1% decline below 10%.

Neutral

“To me this is the type of deal that really works in this market,” the industry stource said.

“The S&P is already down more than 18% for the year. The view, the expectation behind the notes is that with such a pullback, without being bullish, you’re not going to be down another 10% from these levels 15 months from now. You think we’ll have a neutral market.

“To earn a double-digit return on 15 months and on a single index is attractive to me, especially with a buffer.”

The 1.11x leverage on the downside, which is designed to hypothetically bring the amount of principal losses to 100%, was not a concern.

“People are more open about geared buffers than they used to. They see the benefits of adding a tiny bit more risk,” he said.

Big size

He noted that the deal size was large for that type of product.

“But I can see why it gathered such interest. It has a broad potential appeal for a number of different outlooks. Sure, it’s not income, it’s not growth. But if you are uncertain about the direction of the market short term – and a lot of people are – this gives you a chance to outperform in a moderately bullish, moderately bearish market.

“I’d buy it,” he said.

TD Bank offering

Also last week, Toronto-Dominion Bank priced $38.75 million of 0% digital notes due Nov. 3, 2023 linked to the S&P 500 index, according to a 424B2 filing with the SEC. The structure was identical with slightly different terms: the trigger for the digital was at 85% of the initial price; the buffer was at 15% with a 1.1765 gearing; the term was three months longer; and the payout was 14.1%.

“This one is even better. I prefer the deeper protection even if it means extending the term a bit,” this source said.

Both deals were easy to explain to a client, he said, which contributed to their appeal.

“Digital structures provide a compelling level of simplicity. The fact that both notes are tied to a single underlying index makes it even easier to explain, and that’s a plus for advisers,” he said.

Short term volatility

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was not as impressed.

“The S&P is already down a lot. It’s off its highs by almost 20%. It’s a nice entry point, but that’s not enough,” he said.

“I guess my hesitation is the combination of a short-term tenor with a geared buffer on the downside. It’s not just the gearing actually but also the size of the buffer. 10% on a 15-month is not a lot of protection.”

Medeiros said he could “live with” that buffer size over a longer tenor. But the gearing was not his preference.

“I don’t particularly like downside leverage. It’s not that I think you’re going to lose 100% of your investment – even though in theory you could. It’s that we have a potential for more volatility over a shorter period so why add the gearing?

“The combination of a thin geared buffer and a short maturity gives me pause,” he said.

The 13.91% digital payout however was satisfactory.

“I’m fine with that. Although the S&P has already pulled back substantially, I don’t expect high returns and the cap is in line with my expectations.,” he said.

This adviser’s comments on the JPMorgan notes applied to the TD Bank deal.

“The 18-month term is still too short, and a 15% buffer is not much different from a 10% buffer when you deal with short durations,” he said.

J.P. Morgan Securities LLC is the agent for the JPMorgan offering.

The guarantor is JPMorgan Chase & Co.

The Cusip number is 48133F3R4.

The fee is 0,.92%

The agent for the TD Bank noted is TD Securities (USA) LLC.

The Cusip number is 89114Y2E0.

The fee is 1.11%.

Both deals settled on Monday.

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