Asset Backed Securities

What are asset backed securities? How do they work?

Typically, asset-backed securities are financial securities that are secured and/or collateralised (“backed”) by the issuer’s pledge of specific assets as security against a loan; it is a form of collateral. Unless the issuer becomes insolvent or the loan is redeemed, and/or purchased and cancelled early, the issuer promises to pay interest on the loan periodically until the date when the loan becomes repayable (usually on the specified maturity date, although a loan may also become repayable early in certain circumstances), at which time the issuer also promises to repay the amount borrowed. If the borrower becomes insolvent, the specific assets backed by the borrower’s pledge are liquidated and/or passed on to the creditors. Asset backed securities vary widely in type and structure and the above description is not applicable for all asset-backed securities.  

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Credit Linked Notes

What is a credit-linked note? How does it work?

A credit-linked note (CLN) is a debt security whose interest payments and repayment are dependent on the financial solvency of the underlying obligor. If the underlying obligor does not experience a credit event (e.g. insolvency, default on payment or debt restructuring), the credit-linked noteholder receives attractive interest payments that are usually higher than comparable government or corporate bonds and the principal of the CLN is repaid at maturity. In the case of a credit event, the credit-linked note is repaid prematurely and instead of the nominal value of the principal, either either a bond issued by the underlying debtor is delivered or the current value of a reference bond is determined and paid out. The price of the reference bond will usually be quoted far below 100 percent due to the credit event. This renders tradability of the underlying liabilities difficult and weigh further on the price.

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Investment Objectives / Strategies