Is the AI deleveraging storm over? SK Hynix's Korean stock leverage cost plummeted by more than 70%, and Wall Street once again “opened its doors to welcome customers”

The Zhitong Finance App learned that in recent weeks, the capital costs for global investors to bet on SK Hynix (SKHY.US) Korean stocks through leverage have been drastically cut. This change came after the chip giant completed its US listing and experienced a sharp sell-off in artificial intelligence (AI) related stocks.

According to people familiar with the matter, many banks, including Bank of America, Citigroup, Goldman Sachs, and J.P. Morgan Chase, are currently offering customers a spread of about 150 to 300 basis points in the Guaranteed Overnight Financing Rate (SOFR). Customers can obtain risk exposure to SK Hynix Korea shares through swap transactions. As the information in question was not public, these individuals requested anonymity.

Meanwhile, in mid-June of this year, some banks raised SOFR prices by more than 1,000 basis points for new or renewed SK Hynix swap contracts. Since May 1, SOFR has been hovering between 3.50% and 3.69%.

Previously, banks imposed strict quotas on their ability to undertake additional SK Hynix swap transactions. Not only were prices expensive, but sometimes they even directly rejected customer requests. The background at the time was that the AI boom drove SK Hynix Korea stock to soar more than tenfold in the 12 months ending June 22. As market sentiment became extremely bullish, banks began to worry that if their portfolios were too concentrated on such stocks, their financing costs in the repurchase market would be under pressure.

The person familiar with the matter mentioned above said that banks that previously rejected customers are now actively seeking business opportunities again.

This shift shows that banks' concerns about concentration risks have abated markedly in recent weeks. Changes on both sides of supply and demand are driving this trend: on the one hand, SK Hynix issued American Depositary Receipts last month, providing investors with a new way to bullish the chipmaker; on the other hand, the sharp decline in technology stocks in July also brought some leveraged positions to a standstill.

Bank of America's recent survey of fund managers in Asia other than Japan shows that investors have switched from technology stocks and cyclical stocks to more defensive sectors.

Representatives from Bank of America, Citibank, Goldman Sachs, and J.P. Morgan declined to comment.

This type of swap transaction allows fund managers to enjoy corresponding financial benefits without actually holding the underlying stock. Due to factors such as capital controls, taxation, anonymity, and self-leveraging, funds that bet on stock prices in markets such as South Korea, China, and India generally prefer swaps rather than direct shareholding.

Previously, investors chasing AI-related returns once stretched the bank's ability to accept SK Hynix's new swaps, but the impact on Samsung Electronics (SSNLF.US) and TSM.US (TSM.US) was relatively small.

However, the market suddenly turned in July — investors' fears about AI stocks triggered a wave of sell-offs in global markets. According to compiled data, Korea's benchmark KOSPI index fell 22% last month, the biggest monthly decline since October 2008. Together, SK Hynix and Samsung Electronics account for nearly 50% of the index's weight.

As of Tuesday this week, the asset size of the Southern Dongying SK Hynix leveraged ETF, which is listed in Hong Kong, has plummeted to less than US$5 billion, down more than two-thirds from June 25. Initially, this product mainly used swap contracts to achieve double the daily return on SK Hynix Korea shares. Currently, the daily leverage ratio is allowed to fluctuate, with an upper limit of 2 times.

Leveraged single-share ETFs are often criticized for increasing individual stock fluctuations due to their daily position adjustment operations. South Korean regulators have introduced measures to restrict retail traders from trading locally listed leveraged single-share ETFs in order to reduce the magnitude of market shocks.