Credit Linked Note (CLN)

CLNs are bond securities linked to credit risk. These are financial instruments associating the payment of coupons and the repayment of the nominal value with the risk of default of the underlying asset(s) - called a reference entity.

The value of a CLN decreases when the credit risk of the reference entity increases. Thus, the investor is exposed to a double credit risk: that of the issuer and that of the reference entity.

These securities are a combination of a classic bond - allowing the payment of coupons and repayment at maturity - and a credit option (CDS - Credit Default Swap) which deteriorates the bond's payments in the event of default.

There are three types of CLN:

• Floored CLN: if no credit event occurs during the life of the CLN, the investor receives his coupons fixed in advance. However, in the event of an event, the coupons are no longer due,
• Linear Basket CLN Linear: CLN is based on a basket of entities. With each credit event of one of the entities, the coupons and the notional decrease.
• First-to-default (FTD): the CLN is also based on a basket of entities. Unlike Basket CLN, coupon payment stops in the event of default by only one of these entities, and the investor recovers the recovery value.

CLNs are often issued by banks seeking to hedge against the credit risk of an entity on which they hold debt.