[Edaily Reporter PARK MIN ] The six-month “N2317” equity-linked security (ELS) issued by NH INVESTMENT & SECURITIES(005940)in June of this year is facing a crisis as its maturity approaches this December. This product, which uses the KOSPI 200 and #SK hynix as underlying assets, has failed to meet the conditions for both the first and second early redemptions due to a 40–50% plunge in the prices of these two assets. Furthermore, with just two months remaining until maturity, the prices of the underlying assets have fallen into the principal loss (Knock-In) zone.

With the domestic stock market having plummeted by about 40% from its peak, concerns are mounting that a wave of ELS products—which were issued in large numbers during the index rally in June—will fail to undergo early redemption by year-end. Analysts predict that these products will fail to achieve early redemption because the price of the underlying asset has not remained above a certain level during the semi-annual reviews. In particular, if the bear market continues as it is now, principal losses are expected to be unavoidable for some products.

ELS are structured products that provide returns based on stock indices or individual stock prices. They are structured such that if the index or stock price remains above a certain level until maturity, the agreed-upon return is paid; however, if the price falls below the benchmark, investors suffer a loss of principal. In particular, these products are designed to allow for early redemption if, during interim evaluations conducted every three or six months, the price of the underlying asset remains at or above 75–85% of the initial benchmark price.

According to the Korea Securities Depository’s SEIBro on the 26th, a total of 1,135 ELS issues, worth 2.4811 trillion won, were issued during the month of June, when the KOSPI peaked at the 9,000 mark. Of these, 660 products (58.15% of the total) were linked to the KOSPI 200 index, accounting for 1.6499 trillion won (66.50% of the total) in issuance value. In other words, roughly 6 out of every 10 ELS products issued in June were based on the KOSPI 200 as their underlying asset.

During the same period, a significant number of ELS products also incorporated the stock prices of SamsungElectronics and SK hynix as underlying assets, riding the tailwinds of the semiconductor supercycle. There were 194 ELS products incorporating SamsungElectronics, accounting for 17.09% of the total (18.54% by value), while 182 products incorporated SK hynix, accounting for 16.04% (17.23% by value).

The problem is that the stock market has cooled sharply since June. As the KOSPI index plummeted by about 40% from its June high of around 9,000 to below 5,500 by the end of October, the KOSPI 200 index also plunged by 41.92%, falling from 1,477.22 points to 858.02 points. SamsungElectronics also fell 42.90%, from 362,500 won to 207,000 won. SK hynix, in particular, plummeted 58.10% from 2,919,000 won to 1,223,000 won, marking the steepest decline.

An even bigger risk than the failure of early redemption is the loss of principal. As SK hynix’s stock price halved and became trapped around 50% of the reference price, ELS products based on SK hynix—which set the knock-in barrier (the threshold for principal loss) at 45% or more of the reference price—were pushed to the brink of principal loss.

In fact, the one-year “N2321” ELS issued by NH INVESTMENT & SECURITIES on June 18 is continuing its precarious balancing act, with the knock-in threshold now just over 1% away. This product, which raised 7 billion won by touting an extraordinary promised annual return of 47.1%, has an SK hynix knock-in barrier (45% of the initial reference price) set at 1,208,250 won. Intraday lows this month have already dipped below the knock-in threshold, and even based on the closing price (October 22: 1,223,000 won), it is barely holding on by a margin of just 14,750 won (1.2%).

The 3-year “KYOBOSECURITIESCO.,LTD. No. 13614” ELS, issued by KYOBOSECURITIESCO.,LTD. on June 26, also failed its first early redemption trigger (an 85% hurdle of the reference price) last September. This product, which uses SK hynix as its underlying asset, has no intermediate knock-in threshold but features a high maturity knock-in barrier of 65% (1,737,450 won); if the current stock price level persists until maturity, it will be difficult to avoid a loss of principal.

An industry official stated, “More than 90% of ELS products are six-month step-down products, and the first early redemption for those issued in June is due this coming December,” adding “However, given the current situation where the KOSPI has plummeted to the 5,500 level, it is virtually impossible to clear the first redemption hurdle—set at around 85% of the reference price—and a liquidity crunch caused by a large-scale failure of early redemptions could spread throughout the entire ELS market,” the source added.