Credit Linked Note

The term credit-linked notes ( CLN short ) refers to bonds whose repayment amount depends on certain contractually agreed credit events. They belong to the structured notes. They allow you to hedge the issuer's credit risk on bonds and simultaneously mitzupartizipieren investors in the income of the reference debt.

A credit linked note is a combination of a bond by the issuer of the CLN and a credit risk insurance business of the issuer in the form of a purchased credit default swap (CDS). From the bond mentioned, the issuer promises to repay the outstanding principal amount of the bond at maturity. At the same time the issuer has purchased from bond issue a CDS on a particular reference debt and pays the seller of the CDS (investor) a premium ( premium over the basic interest rate ).

Should it come during the term to any credit event that pays the CLN during the total duration and interest is repaid in full at maturity.

If a credit event occurs, the issuer would be due to the bond required to repay the outstanding nominal value. On the other hand, the investor in the CLN (credit risk buyer) would at the same time obliged to pay a compensation payment from the CDS. As part of the loan agreement the payments are netted, with which the issuer is only obliged to pay the difference between the two payments.

A typical credit event is the default of a reference obligation or a reference bond. Turns out the reference credit, the credit linked note is not repaid or only a part.

Also possible are credit-linked notes, relating to credit or bond portfolios. Examples are first- to-default baskets, in which a credit linked note already then fails when the first default occurs within the reference portfolio. Another example are synthetic collateralized loan obligations with which the buyer of a credit linked note is involved in the loss of a loan portfolio.

Credit Linked Notes, thus offering the possibility to transfer credit risk from the seller to the buyer, the credit risk can be put together almost at will.

The two graphs illustrate schematically the cash flows of a credit linked note dar.

Scenario 1 describes the cash flows, unless the agreement event of default absent. At time t0, the buyer of the bonds to the issuer capital in the amount of the nominal value available. In return, receives an usually regular interest payment (t1 to t6) which ensures a fair market return on capital and contains a risk premium for assuming the risk of default. At the agreed due date (tn ) of the bond buyer gets back the capital invested.

Scenario 2 differs in that the agreed credit event has occurred. The issuer at the end of the term ( tn) the invested capital from the bond purchaser Accordingly, reserves a.

In contrast to the credit default swaps where the protection seller pays the agreed amount until the credit event occurs to the protection buyer, the buyer of a credit linked note paid when purchasing the purchase price and receive at the end of the term back for redemption, if the credit event has not occurred. Thus also the issuer risk of the issued by the secured party credit-linked notes, the protection seller must in addition to the risk of default of the reference credit account in the credit-linked note.

With Credit Linked Notes Credit derivatives are also investors open, which can not undergo credit default swaps or may, for example, private investors and insurance companies.

• Banking
• Finance
• Interest-bearing securities