Korea's $3 Billion Domestic Stock-Tied Note Sales Jump to Record

Sales of structured notes tied to domestic stocks in South Korea have surged to a record at more than twice the size of their previous peak, aided by pension funds’ re-investments.

Issuance of such securities reached 3.67 trillion won ($3.07 billion) last month, up from a monthly average of 69.6 billion won in the rest of last year and more than twice the record 1.73 trillion won in October 2007, according to Korea Securities Depository data. Sales of securities in Korea linked to all kinds of equity also rebounded last month, to 7.62 trillion won from 2.98 trillion won in November.

The jump in sales was sparked in part by reinvestment of equity-linked securities that had matured, according to Gyun Jun, a Seoul-based head of derivatives research at Samsung Securities Co.

"The jump in issuance in December has occurred every year since 2011, where the redemption of equity-linked securities would occur intensively and most of that would be reinvested," Jun said. “Buyers are mostly pension funds."

Of the domestic stock-tied notes sold, 86 offerings guarantee at least the principal at maturity, with some assuring returns of between 1.9 percent to 5.01 percent at maturity, and the remaining 25 put investors’ initial investment at risk, the data show. Ninety two out of 111 offerings expire in December next year.

Shinhan Investment Corp. issued 1.72 billion won of two-year securities on Dec. 31, according to KSD data. The products pay a 5.013 percent coupon at maturity with an additional 0.002 percent coupon if the share price of Samsung Electronics Co. at least doubles. A 200 billion won, three-year plain vanilla bond sold by Shinhan Investment on July 1 last year pays a 2.298 percent annualized coupon, Bloomberg data show.

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