Credit Linked Note (“CLN”)is a structured product providing investors an opportunity to receive enhanced periodic coupons by taking on additional credit risk of the Reference Entity. The coupon will be paid unless a credit event occurs.

KEY FEATURES
▪ The underlying Reference Entity can be a corporation or a sovereign country.
▪ Coupon Rate is linked to the level of hypothetical Credit Default Swap (CDS) of the Reference Entity (“Reference CDS”). The higher the Reference CDS, the higher the Coupon Rate.
▪ The periodic coupons are paid (usually on a quarterly basis) regardless of the price movement Reference CDS, provided no occurrence of any Credit Event in relation to the Reference Entity during the life of the product.
▪ Credit Events1 usually include but not limited to any of the followings:

1.Bankruptcy：The Reference Entity files for bankruptcy or similar actions.
2.Failure to Pay：The Reference Entity fails to make a payment with respect to principal and/or interest on its debt obligations which have similar rank and characteristics to the Reference Obligation.
3.Restructuring：The Reference Entity restructures the terms of its debt obligation due to deterioration of its credit worthiness.

（The definition of Credit Events is standardised as per the terms defined by the International Swaps and Derivatives Association (“ISDA”).）

PAYOFF ILLUSTRATION
(Investor should note that the below example is prepared for illustrative purposes only and do not constitute an offer or solicitation of any investment.)

Reference Obligation is a debt instrument issued by the Reference Entity upon which its CDS is based. It is a Standard Reference Obligation (“SRO”) published for all trades on that Reference Entity and seniority level for which SRO is applicable.

Credit Event Settlement can generally be classified into two types –American and European style. American style means that the redemption is paid upon the occurrence of the Credit Event, while European style refers to the redemption is paid only upon maturity.

Scenario 1: Scheduled Redemption Without Occurrence of Any Credit Event
If no credit event occurs, the investor gets a coupon of 8% p.a. on each coupon payment date.

Coupon Payment:
Periodic Coupon Payment =8% p.a. / 4 quarters x USD 1,000,000 = USD 20,000
Total Coupons Received =USD 20,000 x 4 quarters = USD 80,000

Redemption Amount:
CLN will be redeemed at par, and the investor receives full notional amount of USD 1,000,000.

Scenario 2: A Credit Event Occurs During the Life of the Product
Assuming a Credit Event is determined to have occurred on the third coupon payment date.

Coupon Payment:
Investor will receive periodic coupon amounts for the first and second coupon payment dates.
Periodic Coupon Payment = 8% p.a. / 4 quarters x USD 1,000,000 = USD 20,000
Total Coupons Received = USD 20,000 x 2 quarters = USD 40,000

Early Redemption Amount:
Investor will receive the redemption amount which is linked to the recovery value of the deliverable debt obligation determined as per the predefined ISDA auction process and no further coupon payment.

Scenario 3: Worst Case Scenario
Under the worst–case scenario, the investor may lose all of his/her initial invested amount in the event of the issuer’s default or the recovery value of the debt obligation is zero.

KEY RISK FACTORS
• Issuer’s Credit Risk
• Credit Risk of the Reference Entity
• Market Risk
• Interest Rate Risk
• Foreign Exchange Risk
• Reinvestment Risk
• Liquidity Risk
• Limited Secondary Market

Follow us

Find us on Twitter, Instagram, YouTube, and TikTok for frequent updates on all things investing.

Have a financial topic you would like to discuss? Head over to the uSMART Community to share your thoughts and insights about the market! Click the picture below to download and explore uSMART app！

Important Notice and Disclaimer:

We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

This document should not be construed in any jurisdiction as constituting an offer, solicitation, recommendation, inducement, endorsement, opinion, or guarantee to purchase, sell, or trade any securities, financial products, or instruments or to engage in any investment or any transaction of any kind, nor is there any intention to solicit or invite the purchase or sale of any securities.

The value of these securities and the income from them may fall or rise. Your investment is subject to investment risk, including loss of income and capital invested. Past performance figures as well as any projection or forecast used in this article is not indicative of its future performance.

This advertisement has not been reviewed by the Monetary Authority of Singapore