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Merit puts investors in the driving seat

With equity markets still moving sideways and no sign of a revival in corporate profitability, the creation of structured credit products to meet specialized investor needs is one of the few business lines still booming at investment banks. JPMorgan's structured credit business has been taking full advantage of that in recent months.

Earlier in the year it created Jeci, an instrument that gives investors a liquid way to gain diversified exposure to credit default swaps. Now it has devised Merit (Manager Enhanced Return Increasing Tailor-made), an instrument it says solves a problem that has troubled investors for some time. The market for managed portfolio instruments such as collateralized debt obligations (CDOs) gives them little flexibility in terms of structure. Deals are big and syndicated, so they rarely match particular requirements.

The structured credit basket market, by contrast, is primarily distributed through private placements and offers investors all the customization they could want in areas such as timing, structure, duration and format. But these deals have hitherto not been managed independently. Only a few have let investors make limited changes to the underlying basket themselves.

JPMorgan's structured credit team says it has solved this dichotomy. Merit enables investors to choose almost any structure or characteristics they want - whole or partial capital protection, various levels of credit risk, zero coupon, or potential for equity upside, for example.

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