Equity-linked securities (ELSs) issued in the second half of last year have seen an increase in the volume of advanced redemption as global stock markets rise this year.

According to the Korea Securities Depository on Monday, the volume of advanced redemption of ELS products that are based on major underlying assets reached 13.58 trillion won ($10.3 billion) this year as of May 25.

The amount is up 24 percent from 10.9 trillion won in the second half of last year and from 6.9 trillion won in the first half of last year.

ELS products have been delivering strong returns.

The annualized return of the advanced redeemed ELS products averaged 7.14 percent in March, 8.23 percent in April, and 8.78 percent in May, up from 6 percent in January and February

More than 90 percent of domestic ELS products are index-linked, particularly the Euro Stoxx 50 and the S&P 500. Advanced redemption came as most global indices gained in the first half of this year compared to the second half of last year.

“In particular, ELS products with their second advanced redemption saw increases,” said Jung In-ji, an analyst at Yuanta Securities Korea Co.

“ELSs for advanced redemption in the second quarter were issued in the fourth quarter last year and the reference prices are pretty low,” the analyst said.

Among the ELS products that saw advanced redemption, those linked to the Hang Seng China Enterprises Index (HSCEI) and to Tesla Inc. stood out as they both sparked knock-in concerns late last year following stock price plunges.

Of the 10 major ELS types that have made advanced redemption as of last week, three products were linked to the HSCEI. The annualized return has been an average of 8.8 percent.

The average period for the products for advanced redemption was 8.3 months. Those were mainly products issued in September last year when the index hit its lowest level since the 2009 global financial crisis, standing at between 5,900 and 6,600.



Over the past two months in April and May, ELS products backed by a single share of Tesla stock saw a rise in advanced redemption. Their returns stood at between an annual 19.28 percent and 23.15 percent. The average time to advanced redemption was three to four months, with most of the ELSs having been issued earlier in the year.

Industry analysts note that investors in HSCEI-linked products have been the most successful, while most ELS investors in the second half of last year have seen gains.

Industry insiders project that the advanced redemption of ELS products will likely continue until next month. An advanced redemption is estimated based on the issuance price six months before the redemption decision.

Given that the Kospi stood in the 2,200 to 2,400 range in December last year, lower than the current 2,500 range, it could be seen as an indication that any ELS investment in the second half should be made more cautiously.

“Major stock market indices may see fluctuations in the second half of this year amid concerns over an economic downturn in the U.S.,” warned an unnamed industry official.

ELSs are derivative products linked to certain companies or indices, promising returns at agreed rates if the underlying price remains above a certain level. These products usually have a maturity of one to three years, and make payouts or distributions every three to six months after an evaluation.

If prices do not fall below the benchmark, investors get agreed interest payments and principal. If the stock prices plummet below the knock-in barrier, investors may even see losses in their principal.

Due to this reason, many investors aim for advanced redemption when making ELS investments. Advanced redemption indicates that the underlying assets have maintained their value at above certain levels at the time of evaluation.

By Kang In-seon and Chang Iou-chung

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]