Luottosidonnaisia

Luottosidonnaisia, often translated as credit-linked notes or CLNs, are a type of structured financial product that combines a debt instrument with a credit derivative. Essentially, an investor purchases a CLN, which functions as a bond, and the issuer agrees to make regular coupon payments and return the principal at maturity. However, the repayment of the principal and the coupon payments are contingent on the creditworthiness of a specified reference entity or a basket of reference entities.

If the reference entity or entities experience a credit event, such as bankruptcy or failure to pay, the investor may lose a portion or all of their principal investment. This loss is typically offset by payments received by the issuer from a credit default swap (CDS) that is linked to the CLN. The CDS acts as insurance against the credit event, and its payout is used to cover the losses on the CLN.

Investors are attracted to CLNs because they offer potentially higher yields compared to traditional bonds, reflecting the credit risk they are taking on. The structure allows investors to gain exposure to credit risk without directly owning the underlying debt of the reference entity. CLNs are often used by institutional investors like hedge funds and pension funds for diversification and to tailor their credit risk exposure. The complexity of CLNs means they are generally only suitable for sophisticated investors.