Bull ELS- where is the beef?

CIMB has issued 2 instruments, i.e. IOI & Sime Bull Equity-linked Structures ('ELS') that will be listed shortly as IOI-SA & Sime-SA. The term 'Bull ELS' implies that a subscriber or purchaser of this instrument takes a bullish view of the underlying stock. On further reading of the Terms & Conditions of a Bull ELS, one will come away with a very different impression. This seems to be the view shared by the columnist who penned the article entitled "Equity-linked Structures to be listed on Bursa after festivities" in the Starbiz on February 9th.

Let's go thru the numbers, using the Sime-SA. An investor who buys a Sime-SA will fork out RM11.107 per ELS. At the end of the 1-month tenure, the investor will come to the settlement stage. The settlement will depend on the closing price of Sime one day before the Expiry Date. If the Settlement Price is equal or greater than the Exercise Price of RM11.21, the investor will receive a sum equivalent to the Exercise Price, less expenses. Presumably, the expenses will be insignificant, the investor will make a gain of RM0.103 for a holding period of 35 days. If the Settlement Price is less than the Exercise Price of RM11.21, the investor will receive Sime share as physical settlement.

From this, it is easy to make a case for someone who wants to issue a Bull ELS. If the underlying share stayed above the Exercise Price (which was set at 5% discount to the market price on the Issue Date), he would still get to keep his share. If the underlying share went below the Exercise Price, he might not be too sad to exchange his share for a sum equivalent to the Exercise Price (because he would be getting a better price for his share than the prevailing market price on the Expiry Date). All this for a small fee of RM0.103 for a period of 35 days (or, 9.1% per annum, calculated based on the Reference Price). It is very much like an insurance policy for the rainy days.

What about the subscriber or purchaser? You may want to invest in an ELS if you think there is likely to be sunshine or only slight drizzle over the next 1 month. For that cautiously bullish view, you would receive a return of RM0.103 for a period of 35 days (or, 9.7% per annum, calculated based on the Issue Price). In the event of a heavy downpour, you would end up owning the share at a price higher than the prevailing market price on the Expiry Date.



So, should you buy a Bull ELS? If you are really bullish about the market or the underlying stocks, just buy the stocks or the related CWs, instead of a Bull ELS. If you are bearish, you shouldn't touch any Bull ELS. If you are not sure, then don't do anything.