20160407-三星证券-1Q16_ELS_and_DLS_review_21页_1mb

Derivatives Issue Summary

Core Content

This document provides an analysis of the ELS (Equity-Linked Securities) and DLS (Derivatives-Linked Securities) markets in South Korea for the first quarter of 2016, highlighting trends in issuance, redemption, and the underlying assets used. It also discusses the impact of market volatility, correlation risk, and regulatory changes on these markets.

Main Points

ELS Market Trends

• Issuance Decline: ELS and ELB (Equity-Linked Bonds) issuances in 1Q16 were down 60% year-over-year (y-y) but increased 24% quarter-over-quarter (q-q) from 4Q15.
• Recovery from 2015 Shock: The ELS market showed signs of recovery after the 2015 downturn, driven by improved risk appetite and rebounding global markets.
• Redemption Dynamics: ELS redemptions relative to issuances dropped significantly in 2015 due to market instability but rebounded in March 2016.
• Underlying Assets: 93% of ELS in 1Q16 were tied to indices, with a notable shift away from HSCEI (Hang Seng China Enterprises Index) to more stable indices like the EuroStoxx 50 and S&P 500.
• Issuer Performance: Top-ten issuers expanded their ELS balances, while smaller ones saw a decline. Principal-protected ELS balances fell, but principal-unprotected ELS increased due to lower knock-in barriers and higher coupon rates.

DLS Market Trends

• Growth in DLS: DLS and DLB (Derivatives-Linked Bonds) issuances rose 24% y-y to KRW6.1t in 1Q16, with DLS surpassing DLB in volume.
• Underlying Assets: Commodity prices, equity indices, credit risk, and interest rates were the primary underlying assets for DLS. A small portion of credit-based DLS products were issued.
• Maturity Structure: The DLS market saw a shift towards short-term products, especially due to the timing of corporate pension-related redemptions. This also attracted investors who had previously avoided DLS due to losses in commodity-linked products.
• Issuer Behavior: Major DLS issuers saw a decline in balances, while smaller ones experienced growth, especially in DLB products.

Key Information

ELS Issuance and Redemption

• Total ELS Issuances (1Q16): KRW7.2t
• Total ELB Issuances (1Q16): KRW2.5t
• Redemption Rate (1Q16): 85% of ELS redemptions matched issuance levels
• Redemption Rate (2015): Averaged less than 60% due to market downturns

DLS Issuance and Redemption

• Total DLS Issuances (1Q16): KRW2.9t
• Total DLB Issuances (1Q16): KRW3.2t
• Redemption Trends: DLS redemptions increased gradually, but were still outweighed by new issuances
• DLS Issuance by Underlying Asset:
  • Index-based: KRW1.54t
  • Rate-based: KRW1.55t
  • Commodity/Asset-based: KRW4.1t

Underlying Asset Preferences

• Index-based ELS: Dominated with 93% of issuances in 1Q16, with the EuroStoxx 50 and S&P 500 becoming more popular due to the HSCEI cap.
• HSCEI-based ELS: Experienced a significant drop in issuance and outstanding balances, with only 2.3% of total ELS issued in 1Q16.
• Other Indices: The Kospi 200, S&P 500, and EuroStoxx 50 saw increased use and outstanding balances, with the EuroStoxx 50 and S&P 500 being the most popular.

Market Volatility and Correlation Risk

• Volatility Trends: Market volatility increased in 1Q16, leading to higher ELS coupon rates.
• Correlation Risk: Cross-correlation between major indices decreased, except for HSCEI, which remained highly correlated with other indices. This led to increased losses for HSCEI-based ELS.

Outlook

• ELS Issuances: Expected to reach KRW15t by the end of 2Q16 as market volatility and correlation risk abate.
• DLS Issuances: Projected to hit KRW8t this quarter due to a favorable environment and increased investor confidence.
• Risk Management: ELS issuers’ ability to manage risk will be crucial for earnings stability.
• Underlying Assets: The shift from HSCEI to other indices is expected to continue, as HSCEI's instability and regulatory restrictions limit its use.

Conclusion

The ELS and DLS markets in South Korea are showing signs of recovery, with DLS filling the vacuum left by ELS due to regulatory changes and market dynamics. The preference for more stable indices like the EuroStoxx 50 and S&P 500 is evident, and the market is expected to grow further as volatility decreases and risk appetite increases.