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Making a debut - Equity-linked structures to be listed on Bursa after festivities  

Wednesday, 20 February 2008

Making a debut
Equity-linked structures to be listed on Bursa after festivities

BURSA Malaysia will see the debut of equity linked instruments when the Bull ELS (Equity-Linked Structures) of Sime Darby (Sime-SA) and IOI Corp (IOICorp-SA), both issued by CIMB, are listed (as scheduled) right after the Chinese New Year holidays.
Contrary to the term Bull ELS, these securities do not benefit much from a rally in the share price of the underlying securities.
In fact, investors of such instruments would hope for the underlying share price to remain neutral or come off slightly from the spot price during the tenure of the ELS.
Bull ELS is also known as Discount Certificate, a more appropriate name, in some jurisdictions.
When subscribing for Bull ELS, investors have a chance to own the underlying share at a discount to the spot price. Spot price is the underlying share price on price fixing date.
In the case of Sime-SA, subscribers have a chance to own Sime shares at a 5% discount (RM11.21, the exercise price) from the share price of RM11.80 on price fixing date.
Subscribers would in fact pay only RM11.107, the issue price.
However, investors in Sime-SA would only be able to own Sime shares if the closing share price of Sime the day before expiry date (March 5 2008) is below the exercise price.
Otherwise, Sime-SA holders will receive a cash settlement amount equivalent to the exercise price of RM11.21 less exercise expenses.
Subscribers of Sime-SA at issue price therefore give up the upside of the underlying share price for a maximum gain of RM0.103 or 0.927% over the 35 days period of the ELS.
This works out to an annualised yield of 9.67%.
However, Sime-SA holders have to assume the downside risks of the underlying share if the share price drops below the exercise price on expiry.
Sime-SA in some way is an opposite product of the underlying share’s structured call warrants. If an investor buys into a call warrant of Sime, he will enjoy unlimited upside and limited downside of the share price.
An investor of Sime-SA will however have a limited upside and downside which is similar to the underlying share.
For IOICorp-SA, initial subscribers have a chance to own IOI Corp shares also at a 5% discount from the share price of RM7.30 on price fixing date.
However, investors will only receive IOI Corp shares on settlement date if the closing share price on March 4, 2008 is below RM6.935.
If IOI Corp share price is equal or above RM6.935, IOICorp-SA will receive cash settlement price of RM6.935. For investors who managed to get IOICorp-SA during the private placement prior to listing, this represents a yield of 1.122% over 35 days.
Nevertheless, IOICorp-SA holders will also face downside risk similar to shareholders if the share price drops more than 5%.
Subscribers of IOICorp-SA have a slightly better yield of 1.122% compared with Sime-SA.
This may be due to the issuers having a higher implied volatility for IOI Corporation as compared with Sime.
As both the share prices of IOI Corp and Sime are now above the spot prices on price fixing date, Sime-SA and IOICorp-SA are expected to be quoted above the issue price on listing date if the underlying share prices remain firm.
However, it will not be logical to buy these Bull ELS at issue price or above from the market.
This is because the maximum yield of Sime-SA and IOICorp-SA are only 0.927% and 1.122% respectively based on the issue prices.
As the brokerage fees for retail purchase is already 0.6% to 0.7%, buying these Bull ELS at one bid higher than issue price will probably make these investment not profitable at all.
The only reasonable way to play listed Bull ELS is to buy it after the underlying share price suffers a big drop below the exercise price and trading at significant discount to the underlying share.
But if the issuer is active in making market, such scenario is not likely to occur.
After all, warrants issuers like CIMB are just trying to hedge some of the call warrants risks they carry by transferring them to Bull ELS buyers.
Alan Voon of Warrants Capital Sdn Bhd can be reached at

Source : Saturday February 9, 2008

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