Equity-linked notes that pay investors the worst performing stock out of a basket of handpicked equities are increasing in popularity in non-Japan Asia. Nicolas Cohen-Addad, head of equity derivatives at Credit Lyonnais in Hong Kong, said over USD150 million has been sold in the last few weeks compared to only a handful previously. The popularity of the instruments shows investors think the market has bottomed out and are happy to speculate stocks will not plummet anymore, in return for enhanced yield, said another credit head.
In a typical note, usually with a two-to-three year maturity, investors select four or five stocks, as well as a threshold level typically 70-80% of the initial stock prices. If by maturity all stocks remain above the threshold level, they receive an enhanced yield. Alternatively, if a stock sinks below the threshold, the investor is delivered the worst performing stock at maturity.
The product is attractive because as investors select the shares for the portfolio, they can choose stocks they are comfortable owning if the threshold level is breached. If the level is not broken they will receive a return much higher than standard ELNs. Typical sizes range from USD2-10 million per note in Asia and are usually structured on Hong Kong or Taiwan underlyings, but also on global stocks, such as blue chip U.S. names. Yields range between 10-12%.
