Credit Linked Note is a popular tool of fixed Income investing. It is closely related to traditional bonds and bond ETFs.

Credit Linked Note can be used to achieve higher coupon rates without increasing the risk in the same proportion or, for example, to target similar yield at a lower risk level. The demand for higher coupon rates is particularly pronounced in a very low interest rate environment.

Credit risk included in the investment forms the basis of the coupon rate. A good example of this is the yield offered by the High Yield corporate bond market. As probability of individual insolvencies for these companies is relatively higher, the credit risk is often highly diversified in terms of credit risk. 

Terms of Credit Linked Notes are often further tailored to achieve the best possible risk return profile. A good example of this is the tranching of credit risk. By using different tranches, it is possible to target higher yields and a lower risk than can be achieved with a standard diversification of the credit risk. Tranching is often used to minimize the unfavorable effect of possible credit events and can be used with an aim to avoid it altogether.
Credit Linked Notes are not principal protected. Especially Credit Linked Notes with very high coupon rates may possibly expose investor to losses in market conditions where credit events / default rates increase significantly.

Recommended holding period of Credit Linked Notes is until the maturity date. However, if necessary, all can also be sold during the investment period.

Credit Linked Notes pay a regular fixed income. From time to time we may also use the credit risk to target capital growth.

For more information on Credit Linked Notes available for subscription, please contact your customer contact person.

Please also have a look at the realised returns of Credit Linked Notes and other structured investments.