What is a Credit-Linked Note (CLN)?
A Credit-Linked Note is an instrument that is issued by companies who wish to raise finance. Similar to a bond, the issuer defines the underlying “credit risk” to the investor, in exchange for a fixed or floating coupon.
The CLN can be more flexible than a bond, offering issuers and investors to choose their exposure level. The structure allows issuers to offer multiple types of collateral to the vehicle, blending traditional corporate credit risk with tangible assets and assigning the rights of the collateral to the investment vehicle.
It is important for investors to be aware of the underlying security available to them and what happens in the event of non-payment or default.
CLN as a funding resource
Imagine a company is seeking financing (e.g., £ 10 million) to support a new business initiative or development project. Rather than relying on traditional channels, it decides to approach private or qualified investors such as family offices, high-net-worth individuals, holding companies, and private funds.
Traditional fundraising options may be unsuitable for several reasons:
- Conventional Loans: Bank loans may come at high costs or place undue strain on the company’s creditworthiness.
- Bond Issuance: The amount needed may be too low to justify the expense and complexity of issuing bonds.
- Capital Stock Increase: Raising equity capital could lead to unwanted shareholder dilution, which the company may wish to avoid.
One solution is the issuance of a Credit Linked Note (CLN) to raise the necessary capital from a network of private investors. This structure can offer investors assurance, with the transaction managed through a regulated vehicle that adheres to standards set by financial supervisory authorities in the issuing country, ensuring protection for the investors.
For the company, this method offers a flexible, time-efficient, and cost-effective financing option. Since a CLN is a regulated instrument, key terms such as payment structure, duration, coupon frequency, and amounts are predetermined, benefiting investors with clear expectations and predictable returns.
Why Credit Linked Notes?
- Enable securitisation of a loan backed by the target company’s assets.
- Allow the acceptance of debt capital from multiple qualified investors.
- Provide investors with a return that is independent of traditional bond yields seen in standard financial markets.
- As a bankable instrument, the CLN can be purchased through any credit institution and held in an investor’s securities portfolio.
- The financing arrangement is governed by transparent terms and documented in an official Term Sheet, issued by the regulated entity responsible for the financial instrument.
- Offer investors redemption options prior to the financing transaction’s maturity date, as agreed with the target company.
- Ensure full repayment of the invested capital at the product’s maturity.
