How Credit Linked Notes (CLNs) Offer a Strategic Advantage

Among the various funding mechanisms available, Credit Linked Notes (CLNs) offer a highly flexible, investor-friendly, and efficient solution for real estate companies looking to raise capital without compromising ownership or taking on burdensome debt.

What Are CLNs?

CLNs are structured debt instruments that allow a company to raise capital by transferring credit risk to investors. Instead of issuing traditional debt or equity, the company sets up a structure where investors effectively take on the credit risk of a third party (such as tenants or a guarantor). In exchange, investors receive an enhanced yield via a regular coupon.

Real Estate Example:

Problem Statement: A real estate company seeks to expand its portfolio of buy-to-let properties. It currently owns five properties but lacks the liquidity necessary to pursue new acquisitions. The firm must evaluate funding strategies that preserve ownership, manage risk exposure, and maintain long-term profitability.

Key Benefits of CLNs for the Real Estate Company

Benefit Description
Preserve Ownership Unlike equity sales or joint ventures, CLNs allow the company to raise capital without giving up any ownership or control.
Lower Cost Compared to Equity CLNs typically carry a lower cost of capital than equity, especially when credit risk is transferred to a lower-risk third party.
Off-Balance-Sheet Potential Structured appropriately, CLNs can be structured to have minimal impact on the balance sheet, preserving financial ratios and borrowing capacity.
Flexible Structuring The note can be customised to align with the company’s asset or strategy profile, cash flow timing or desired maturity.
Investor Appeal CLNs provide investors with the ability to invest into the structure via an ISIN and offering attractive risk-adjusted returns and exposure to real estate-backed cash flows without direct property ownership. It lowers the entry barriers for investors to get involved with Real Estate.
Speed to Market CLNs can often be executed faster than regulatory-heavy instruments like REITs or securitization vehicles.

Other Liquidity Options – and Why CLNs Outperform

While the company has alternative funding routes, each comes with trade-offs:

  • Selling Equity: Fast access to capital but involves ownership dilution and future profit sharing.
  • Bank Loans: Require collateral, incur high interest, and reduce operational flexibility.
  • Mezzanine Debt: Can be expensive and may convert to equity under certain conditions.
  • REIT Formation: Access to public capital but involves significant compliance, and limits earnings retention.
  • Joint Ventures: Share capital and risk but require shared control and aligned vision.

In contrast, CLNs deliver capital efficiently while avoiding the downsides of ownership dilution, rigid covenants, or operational interference.

Conclusion: CLNs as a Targeted Solution for Growth

Credit Linked Notes present a compelling opportunity for the company to unlock liquidity quickly, flexibly, and without surrendering control. For real estate firms with stable rental income and credible tenants, CLNs offer an ideal vehicle to expand their portfolio while appealing to yield-seeking investors.

This structure provides a win-win: investors gain access to diversified real estate credit exposure, and the company secures the capital it needs to scale operations all without compromising its strategic autonomy.