Loan Participation Notes (LPN)

Loan participation notes (LPN) are a type of fixed-income securities that package exposure to a loan or a set of loans into a marketable obligation (security). Essentially, LPNs securitize a loan or a loan portfolio.

Holders of LPNs participate on a pro-rata basis in collecting interest and principal payments, and are similarly exposed to a proportional risk of default.

Should the underlying loan(s) default, the capital loss is transferred to LPN investors who may thus get less than they originally invested (or even zero).

LPNs are a great tool to securitize not only performing, but also defaulted loans. Thus the originator (the original owner of the defaulted debt) may raise money to defend its position as a creditor (in bankruptcy or otherwise), and the investors get a chance to receive a gain if the eventually collected amount exceeds the original (discounted) issue price of the LPN.

In less challenging scenarios LPNs are used to securities packages of similar loans (such as car loans or mortgages) which among other benefits enable the original creditor to «clean up» its balance sheet and obtain refinancing.