Credit-Linked Note (CLN)

Credit-linked note is a security with a credit default swap structure that allows the issuer to transfer credit risk to investors. Credit-linked notes are usually issued through special purpose vehicle or trusts backed by top-rated bonds. In this case, investors buy credit notes through the trust, which pays a fixed or floating coupon over the life of the bond.

If a so-called credit event does not occur, the note holder receives profitable coupon payments, which are usually higher than government or corporate bonds with a comparable level of risk. At the end of the term, the principal amount of the credit-linked note is paid at par. In the case of a credit event, the credit-linked note is repaid ahead of schedule; the obligations of the respective debtor (bonds or loans) are deducted from the face value at the residual value, or the value of the reference obligations is determined and paid. For linear credit-linked notes, coupon and principal payments are based on the number of debtors that have had credit events. Each occurrence of a credit event reduces the principal and coupon payments. Accordingly, no early repayment is made for linear credit-linked notes, but the payment occurs at the end of the validity period of the notes.