SK Hynix Leverage Costs Halve as AI Selloff Eases Crowded Bets
Forecast Trend Report by Period
Funding costs for global investors seeking leveraged exposure to SK Hynix Inc. have fallen by about half in recent weeks. The decline reflects easing demand for swaps tied to the South Korean chipmaker after its US American depositary receipt listing and a sharp correction in artificial intelligence-related stocks.
Bloomberg reported on August 20 that global investment banks including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. have recently quoted clients rates of about 150 to 300 basis points over the Secured Overnight Financing Rate, or SOFR, for swap exposure to SK Hynix's Seoul-listed shares.
That is a sharp drop from mid-June, when some banks demanded spreads of more than 1,000 basis points over SOFR for new swap contracts or renewals of existing ones. SOFR has traded between 3.50% and 3.69% since May.
At the time, SK Hynix shares had surged about 11-fold from June last year through June 22 this year on enthusiasm for AI spending. That left global investors' bullish bets heavily concentrated in the stock. Banks responded by demanding steeper spreads or refusing new trades altogether to manage excessive swap exposure tied to SK Hynix.
The backdrop has since shifted. After SK Hynix issued ADRs in the US last month, overseas investors gained another avenue to bet on the stock's upside besides swaps on the local shares. Existing leveraged positions were also cut sharply after a global technology stock selloff in July. Some banks that had previously turned away new business have resumed seeking clients, according to people familiar with the matter.
Concerns about stretched AI stock valuations spread further last month, triggering a steep correction in South Korea's equity market. The Kospi index plunged 22% in July, its biggest monthly drop since October 2008. SK Hynix and Samsung Electronics Co. together account for about half of the Kospi's market capitalization, making the semiconductor selloff a direct driver of the benchmark's decline.
The cooling was also swift in leveraged products. Assets in CSOP Asset Management's Hong Kong-listed SK Hynix leveraged exchange-traded fund have shrunk to less than a third of their June 25 level, falling below $5 billion as of August 19. The product was designed mainly to use swaps to deliver twice the daily return of SK Hynix's local shares, though it is now managed so the leverage ratio can be adjusted daily up to a maximum of two times.
A swap is a derivative that allows investors to capture the economic return from a stock's price movements without directly owning the underlying shares. Global funds investing in markets including South Korea, China and India sometimes use swaps instead of buying stocks outright because of capital controls, taxes, anonymity and the ability to use leverage.
Bloomberg said the drop in funding costs suggests concern in the banking sector over concentrated SK Hynix risk has eased. A recent Bank of America survey of Asian fund managers also showed investors in Asia excluding Japan cutting exposure to technology and cyclical stocks and rotating into defensive shares.
