In South Korea, the coveted 100 Trillion Club refers to companies with more than that in won of annual revenue and denotes stability. Brokers in the nation are now applying the moniker to high-yielding structured notes tied to stocks of companies including Apple Inc. and Facebook Inc.
Sales of structured notes linked to shares of companies outside Korea rose 151 percent to 3.52 billion won ($3.2 million) in May, the most since November 2006, Korea Securities Depository data show. While still a small fraction of total equity-linked securities sales, offerings have increased sharply in recent months, the data show.
Using individual stocks as the underlying asset for equity-linked notes can help generate a greater return for investors, according to JPMorgan Chase & Co., at a time corporate notes in Asia’s fourth-largest economy are yielding an average 2.027 percent, close to a record 1.944 percent low.
“Demand for U.S. stocks has picked up because the underlying products are currently more volatile and therefore can offer a more attractive return versus an index,” said Lemuel Lee, the Hong Kong-based head of third party distribution for equity derivatives in Asia Pacific at JPMorgan. “Blue chip stocks and themes such as tech appeal to the broader retail and private investor base because they’re household names.”
A 63 million won, three-year note sold by Kiwoom Securities Co. on May 27 pays a 14 percent annualized coupon and may be redeemed early if both Facebook and Apple shares hold above a certain level. If either of the stocks has dropped by more than 15 percent at maturity and fell by more than 40 percent at any time over the three years, investors take a loss on their principal.
“Buyers of equity-linked products in Korea want notes tied to other underlying securities for diversification and added yield,” Gyun Jun, a Seoul-based derivatives analyst at Samsung Securities Co., said. “This trend will go on and be strong this year.”
An over reliance on structured products tied to stock indexes has also caught the attention of the nation’s regulator, who is concerned such notes can pose too high a risk considering a steep fall by the index in question may lead to considerable investor losses, according to Jun.
Last month, some 97.9 percent of the equity-linked structured notes sold in Korea were tied to indexes, depository data show. About 1.9 percent were tied to domestic stocks and just 0.05 percent to foreign shares. Some popular indexes were the Kospi 200 Index, the Standard and Poor’s 500 Index and the Euro Stoxx 50 Index.
Local companies in the 100 Trillion Club include Samsung Electronics Co. and Hyundai Motor Co. Brokers Kiwoom and Daishin Securities Co. are among those marketing their foreign equity-linked structured notes under the banner.