"Meta, PayPal, Samsung Electronics, Even You"… ELS-Melting Barrier 'Touch'

Meta, PayPal-linked ELS 'Melting' Touch
High Principal Loss Probability for Samsung Electronics-linked ELS Issued Last May

[Asia Economy Reporter Hwang Yoon-joo] Investors in equity-linked securities (ELS) are on edge. ELS issued based on U.S. stocks such as Meta (Facebook) and PayPal have entered the principal loss zone known as 'knock in' (knock in - principal loss zone). Samsung Electronics ELS has effectively confirmed principal loss. This is due to the sharp decline in the stock market as major central banks, including the U.S., accelerate their tightening monetary policies.

According to the Korea Securities Depository on the 29th, recently, all Meta-linked ELS have fallen below 50% of the issue date stock price (reference price), triggering the knock-in zone. PayPal-linked ELS also touched the knock-in level.

Simply put, ELS are bonds with conditions tied to stock price decline rates. Instead, a stock price decline limit and a principal loss zone (knock in) are set relative to the reference price. The stock price decline limit is generally 75-95% of the issue date stock price.

If the stock price every six months is above the decline limit, interest and principal are paid early even before maturity. Even if it falls below the decline limit but remains above the knock-in price, investors can wait another six months. During this period, they can receive additional interest.

The problem arises when the knock-in price is hit. This is usually set at 45-55% of the reference price. Once an ELS touches the knock-in, if the stock price on the maturity date is lower than the issue date price, there is a possibility of principal loss. Although it varies by securities firm product, repayment amounts are generally calculated based on the lowest price.

The two Meta-linked ELS must maintain at least 80% of the reference price on the maturity date to receive principal and interest, and the PayPal-linked ELS must maintain at least 75%. Therefore, the Meta ELS must hold $297.96 (July 26, 2024) and $281.56 (August 2, 2024) respectively on the maturity dates. The PayPal ELS must not fall below $173.46 (November 1, 2024) and $156.22 (November 12, 2024) on their maturity dates.

As of the 28th (local time), Meta's stock price closed at $205.73, and PayPal at $92.09. The two Meta ELS need to rise by 44.8% and 26.9% respectively to avoid principal loss. The two PayPal ELS need to increase by 46.9% and 41.0% respectively.

Domestic stock-linked ELS are equally unstable. Samsung Electronics-linked ELS, the largest by market capitalization on the KOSPI, entered the knock-in zone in April. The knock-in threshold for Samsung Electronics-linked ELS issued by Hana Financial Investment in May last year is 85% of the issue date price (80,100 KRW). If Samsung Electronics' stock price falls below 68,085 KRW, it enters the knock-in zone. If it falls below 80,100 KRW on the maturity date (May 17), principal loss is confirmed.

A securities firm official said, "ELS are products that can maximize returns in volatile markets, but if stock prices fall more than expected or in a bearish market, the possibility of principal loss increases," adding, "Investors should carefully review early redemption and maturity redemption conditions before investing in ELS."

This content was produced with the assistance of AI translation services.