The equity-linked note market in Korea, one of the largest in the region, has been hit by a wave of knock-ins which is dampening interest in the product. While the knock-in trades are a small minority of outstanding issues, it is having ramifications on the overall market. "There have been a lot less new structures being put on," said an official at JPMorgan. "Clients are becoming more cautious."
In such structures, referenced to domestic indices, baskets or stocks and typically with a maturity of three years, an autocall level is set at 80% of the initial spot level and a knock-in barrier placed at 60%. At six-month observation dates an investor will be redeemed early if the underlying is above the autocall level, whereas if the knock-in barrier is breached during the life of the deal, the investor receives the final reference-price times the initial investment at maturity.
Such products have proved popular in the last few years in Korea on the back of a strong bull market, which resulted in many ELNs being called early and rolled back into the market. A marketer at a European house estimated about USD1.5 billion in such notes are structured every month in Korea. Declining market conditions, however, could see interest in the product fall by 30% or more this year, he estimated. "First roll-over money won't happen since the structures are not being redeemed and secondly fresh money will hesitate due to the market situation," noted the marketer.
As a result of the fall in demand, bankers are trying to improve the attractiveness of the ELNs. "We need to further tweak these deals," said another equity salesman. For instance, knock-in triggers are falling to 50% from 60% and many deals are starting to be structured with a two-year maturity rather than three-years.
