A wave of equity-linked notes issued late last year on Hong Kong underlying have hit redemption-trigger levels given the surprising market rally this month. The broader Hang Seng Index is up nearly 5% year-to-date with many stocks up over 10%.
The notes, mainly structured in the fourth quarter of last year, are typically worst-of structures referenced to single stocks or--more commonly--baskets. The structures tend to have callable levels set 5-10% above initial stock prices and maturities of one to two years if these callable levels are not reached.
"The rally in January has been extremely strong," said Edward Ho, senior managing director at Bear Stearns in Hong Kong, adding, "Most of the structures done late last year have been auto-called and clients are rolling them into new positions." Such trades are usually sold via private banks and range from USD2-20 million per transaction. Basket structures usually involve three to five stocks.
