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Thread: ELK Equity Linked Securities

  1. #1
    Sitri
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    Default ELK Equity Linked Securities

    Mel or Kat

    So I was looking at a Haliburton ELK. EHC or Caterpiller EKC

    What do think about these type of investment instruments.

  2. #2
    Banned Katrine's Avatar
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    Default Re: ELK Equity Linked Securities

    Hmmm, I was just talking about using derivitive instruments to protect against downside risk. I think they are move from an overweighted position in one asset class in a less risky manner. Since both of those companies are individual stock, it might be a safer way to hold individual stocks. Of course, I wouldn't by Cat stock anyway, knowing what I know about that companies past instabilities, but then again, past performance isn't indicitive of future....yadda yadda, you know the drill...

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    Banned Melonie's Avatar
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    Default Re: ELK Equity Linked Securities

    I assume you're referring to the Citigroup family of one year ELK's ...

    personally speaking, if I was looking for 'interest/dividend' income, I'd probably buy a gas / oil royalty stock instead (although the 9% Cat ELK is pretty solid) so I wasn't forced to eat commissions on an annual basis when the ELK matures and you're forced to buy a new 1 year ELK.

    If I was looking to make a one year 'dice-roll bet' on a company itself I'd probably buy LEAP options. -

    If I was forced to buy one ELK myself it would probably be Newmont Mining on a pullback given the recent 'torpedo job' on gold by the central banks !

    Basically, I look at ELKs linked to individual companies as little more than bonds with rather poor liquidity and lots of embedded costs. If you've got enough cash, skip the ELK and buy the actual bond (but that's the kicker, the minimum bond investment is probably 5 figures ... the rich get richer).
    Last edited by Melonie; 09-06-2006 at 09:52 AM.

  4. #4
    Sitri
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    Default Re: ELK Equity Linked Securities

    Thanks, I will research it tonight. My son is finishing up is Masters in Finance so I am having him price out the option part of the derivitive and see if these are a good deal. ..

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    Banned Melonie's Avatar
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    Default Re: ELK Equity Linked Securities

    ^^^ Sitri, I'd be extremely curious to see how the 'embedded costs' break down versus straight options and straight bonds. I gotta believe that Citigroup is raking a substantial cut for their repackaging trouble.

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    Banned Katrine's Avatar
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    Default Re: ELK Equity Linked Securities

    I was also thinking of suggesting a LEAP. I wouldn't by an individual stock without some type of safety net, in general. Royalties are nice, but you've got to consider the they are usually paid out quarterly= S-T cap gains at ordinary income. But that might be neither here nor there....

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    Banned Melonie's Avatar
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    Default Re: ELK Equity Linked Securities

    Royalties are nice, but you've got to consider the they are usually paid out quarterly= S-T cap gains at ordinary income
    So are the dividends paid by the ELK's, with no option of claiming long term gains on ELK price gains either if the ELK maturity date occurs before a year is up. At least with the royalty stocks you can hold them as long as you choose to.

  8. #8
    Sitri
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    Default Re: ELK Equity Linked Securities

    I use this for stock research. So, as long as HAL common stock does not drop by more than 25%, you receive your investment +11%. If it drops by more than 25%, you will receive the stock +11%.
    So, it this were to happen, I think EHC then trades in direct correlation with the stock like a call.






    Citigroup Funding ELKS 11% Halliburton Co. due 8/27/2007
    Ticker Symbol: EHC CUSIP: n.a. Exchange: AMEX
    Security Type: Special Product - Company Based

    SECURITY DESCRIPTION: Citigroup Funding Inc., 11% ELKS (Equity LinKed Securities) based on the common stock of Halliburton Co. (NYSE: HAL), due 8/27/2007, and issued at $10 per ELKS. The ELKS pay a total of $1.0908 in cash composed of $0.5242 in interest and $0.5666 in option premium, which is payable on 2/27/2007 and 8/27/2007 to holders of record at the close of business on the third business day prior to the payment date. At maturity the holder will receive either 0.29455 common shares of Halliburton if the price of Halliburton's shares at any time during the term of the ELKS is less than or equal to $25.46 (75% of the initial share price of $33.95 on 8/25/2006) or $10 in cash. The ELKS are not principal protected and at maturity the holder could receive common shares whose value is less, and possibly significantly less, than the original investment in the ELKS. See page PS-2 of the IPO prospectus for further information on the ELKS and their maturity payment by clicking on the ‘Link to IPO Prospectus’ provided below. The ELKS are senior unsecured debt securities issued by Citigroup Funding Inc., guaranteed by Citigroup Inc. and will rank equally with all of their other unsecured and unsubordinated debt. Citigroup Funding Inc. is a wholly-owned subsidiary of Citigroup Inc. (NYSE: C) whose business activities consist of providing funds to Citigroup Inc. and its subsidiaries for general corporate purposes.
    Last edited by Sitri; 09-07-2006 at 05:25 AM.

  9. #9
    Sitri
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    Default Re: ELK Equity Linked Securities

    Well, it breaks down like this.
    Of the $10 you pay them, you get 5.2% interest on your money.
    You are also selling them a Put on Haliburton for $.56 for 1/3 share, if it drops to 75% of the issue day price. So, if it drops to say $25.00 I get the stock and they get out.

    Based on my son's variance analysis of Haliburton, we should be selling if for about $3.50 a share.

    Therefore, a bad deal.

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    Banned Melonie's Avatar
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    Default Re: ELK Equity Linked Securities

    ^^^ thought as much. Thanks for taking the trouble to quantify Citigroup's 'repackaging' premium.

  11. #11
    Sitri
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    Default Re: ELK Equity Linked Securities

    Quote Originally Posted by Sitri
    Well, it breaks down like this.
    Of the $10 you pay them, you get 5.2% interest on your money.
    You are also selling them a Put on Haliburton for $.56 for 1/3 share, if it drops to 75% of the issue day price. So, if it drops to say $25.00 I get the stock and they get out.

    Based on my son's variance analysis of Haliburton, we should be selling if for about $3.50 a share.

    Therefore, a bad deal.
    I actually explained this poorly as I was in a rush. The price for the put option for 1 share of Haliburton at that time came out to $3.50 / share. So the option pricing should have been .3*3.50 or about a $1.20 not the $.56 they have indicated. So the "fair" price should have been $10.00 less .64 or about $9.36.

    Given the recent pullback, Halliburton was close to the trigger price of $25.46 and the price of the derivitive plunged to $8.70. So, I pick up 1000 shares and it is now back up to 9.45.

    If HAL doesn't flake out, I can make a total return of $2.30 on 8.70 in 1 year for 27%. But, I may bail if HAL gets to volatile and I can get 10%. I am watching closely.

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