Lehman to structure South Korean equity-linked securities

Lehman Brothers plans to structure 2.5 trillion won ($2 billion) of South Korean equity-linked securities to be issued and sold by two domestic securities firms in South Korea. The move follows regulatory changes at the end of February that allowed securities firms with over-the-counter derivatives licences to issue and sell equity-linked securities, including equity-linked notes and warrants, to investors in the country.

“Samsung and Goodmorning Shinhan Securities have the derivatives dealer licences onshore and investors are now allowed to purchase equity-linked securities issued by their dealers,” said Timothy Throsby, head of Asian equities at Lehman Brothers in Tokyo.

The securities will be linked to a basket of South Korean listed equities and offer investors the choice between 10% or 20% first-loss protection on downside market risk by embedding either a 100/90 put spread or a 100/80 put spread. The investor simultaneously sells call options on some of the stocks in the basket, using the premiums from the call options to fund the put spread. Investors still participate in the upside of around 70% of the stocks in the basket.

The three-year notes are aimed at domestic institutional investors. Samsung Securities and Goodmorning Shinhan Securities – two out of six securities firms that received OTC derivatives licences following liberalisation of the country’s OTC derivatives market last July – will issue and sell the securities.

LG Investment and Securities, Daewoo Securities, Hana Securities and Dongwon Securities also hold OTC derivatives licences.