Credit Linked Notes (CLN)

Credit linked notes are securities with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. CLNs are created through special purpose vehicles (SPVs) or trusts.

CLNs pay a fixed or floating coupons during the life of the note.

At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate.

With very few exceptions, these securities are for sophisticated investors who fully appreciate the risks associated with this product.

CLNs are rarely exchange traded, as the inherently complicated pricing mechanism makes it challenging to value this instrument on a daily basis.

Most CLNs are purchased by customers with a specific risk bet in mind and are held to maturity when the ’bet’ is either realized in a gain or not.