Merrill Lynch is pitching a trade in Japan, in which investors use the equity dividend to purchase credit protection. "You can't just focus on one side of the story, to really extract value you need to cherry pick between all the asset classes," said Ken Chang, head of equity-linked research in Tokyo.
The firm is pitching a relative value play whereby it suggests going long equity on railroad company Tokyu Corp., which Merrill feels is undervalued. Investors then use the proceeds of the stock dividend to finance buying five-year credit-default protection on Hankyu Corp. The company is in the same sector as Tokyu and subject to similar market risks, but the credit spread carries a much higher risk than Tokyu despite a slightly wider level and is expected to widen out further over the life of the trade. "Credit protection can be financed by the equity dividends and with credit spreads at these levels in Japan this trade makes sense where there is a positive equity story," noted Chang.
