JPMorgan enters the warrant market with a twist on instalment warrants

This article by JPMorgan explains the features, benefits and risks of instalment warrants and how its new product ‘DARWINS’ offers a unique twist on traditional investment-style instalment warrants.

What are instalment warrants?

An instalment warrant is a financial instrument issued by financial institutions and traded on the ASX. It is a way of borrowing to invest in shares or other underlying assets to achieve a desired result, such as maximising dividend returns. Diversification, the cornerstone of successful investing, is another important benefit.

The ASX has operated a warrant market since 1991. The market began by trading equity call warrants, but now a number of different warrants are available for trading or investment including instalment warrants.

With instalment warrants, investors pay a proportion of the asset price upfront and borrow the rest. The asset is then held in trust for the investor for the life of the loan. The final instalment payment is optional. Investors make this payment only if they wish to continue holding the underlying shares.

Warrants with an investment purpose, such as instalment warrants, are generally longer-dated, tend to experience less market trading volumes and generally have a lower risk/return profile. Instalment warrants are eligible investments for self-managed super funds (SMSFs).

What are the benefits of instalment warrants?

• Achieve a leveraged exposure to an underlying share giving greater return potential
• Diversify your exposure to the sharemarket through unlocking cash from existing share holdings
• Generate an income stream through dividends and franking credits (if eligible)
• There are no credit checks or margin calls

DARWINS: JPMorgan’s twist on instalment warrants 

JPMorgan has an enhanced offering known as DARWINS (Dividend Advance Resettable Warrant Instalments) where up to 75 per cent of the estimated dividends are advanced to the warrant-holder on day one. By reducing the upfront payment, leverage is increased. Moreover, the loan amount is reviewed annually on the reset date in order to maintain a constant gearing level from one year to the next.

This new twist is in response to client feedback which indicated that investors wanted to keep their gearing at a certain level over a longer period. They also wanted the dividends working for them in advance yet still be able to maintain their exposure to any capital returns or special dividends which would then be used to pay the outstanding loan amount.

Investors can purchase DARWINS on the ASX via their stockbroker by paying the first instalment. JPMorgan Investments Australia Limited will lend the loan amount and dividend advance amounts to the investor and at the same time hold the associated underlying security in trust.

The underlying securities for DARWINS include select blue chip stocks with a history of strong dividend payments, increasing the potential for greater returns and leverage.
DARWINS also offer the benefit of available franking credits (if eligible) attached to dividends paid by the underlying stock, which may deliver post-tax yield advantages.

Comparison of DARWINS to Regular instalment warrant

Potential investor benefits of DARWINS

• The ability to leverage your exposure to shares in leading ASX-listed securities with limited recourse financing
• Economic benefits of share ownership for part of the upfront cost of acquiring the underlying securities
• Receiving the benefit of all dividends, franking credits (if eligible) and capital appreciation in respect of the underlying securities
• Being advanced a proportion of the expected dividends at the time of purchase and on reset dates through the dividend advance feature
• The ability to make the final instalment payment and take delivery of the shares once a year on a reset date or the expiry date
• The ability to exercise your DARWINS once a year on a reset date
• The ability to free up capital for other investments by making a shareholder application for DARWINS without triggering a capital gains event
• The ability to trade DARWINS on the ASX

Key risks of investing in DARWINS

• A decrease in the value of the underlying securities decreases the value of the DARWINS
• Any losses in the underlying securities has a greater impact on the value of the DARWINS compared to the underlying securities, because DARWINS are leveraged financial products
• Potential total loss of the DARWINS first instalment

DARWINS are not guaranteed by the ASX, the National Guarantee Fund, or any other body.

How to invest in DARWINS?

You can acquire DARWINS on the ASX through your stockbroker or by lodging an application via your financial adviser with JPMorgan Investments Australia Limited.

Visit www.jpmorgansp.com.au or freecall 1800 157 620 for further details on investing in DARWINS.

JPMorgan

JPMorgan has global assets of US$1.4 trillion and is a leader in investment banking, asset management, private equity, consumer banking, private banking, e-finance, and custody and processing services.

With more than 160,000 people in over 100 countries, JPMorgan provides a comprehensive range of financial products, services and integrated financial solutions for companies, institutions and individuals worldwide.

DARWINS are issued by JPMorgan Investments Australia Limited (ABN 21 056 751 716) (AFSL 298633) (“JPMIAL”). The Product Disclosure Statement (PDS) dated 9 May 2007 relating to DARWINS is available from www.jpmorgansp.com.au. The information provided does not take into account your financial circumstances, needs or objectives. Before investing in DARWINS you should carefully consider whether this product is appropriate for you by reading the Product Disclosure Statement for DARWINS and consulting your financial adviser or stockbroker. JPMIAL has applied for a Product Ruling from the Australian Taxation Office dealing with the main tax consequences to certain types of investors of investing in the product. As at today’s date, JPMIAL has not received the Product Ruling. You should seek your own taxation advice before making any investment in DARWINS © 2007 JPMorgan Chase & Co. JPMorgan is the marketing name for the equity derivatives businesses of JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide.