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Erste Group credit linked notes

What is a credit linked note?

A credit-linked note (CLN) is an interest-bearing debt security whose interest payments and repayment are contingent on the creditworthiness of the reference debtor (e.g. state or company). In the absence of a so-called "credit event", the investor receives regular coupon payments which are usually higher than in the case of comparable government or corporate bonds. At the end of maturity the CLN is redeemed at 100% of face value.

What is a credit event?
Each of the following incidents represents a credit event: bankruptcy, failure to pay and restructuring.

How does a credit linked note work?

When the reference debtor meets its payment obligations as scheduled, the investor receives regular coupon payments and the CLN is redeem at 100% of the face value on due date. If an event affects the solvency of the reference debtor ("credit event"), the coupon payment is reduced or even cancelled in full, and the redemption is omitted either partially or even completely. Furthermore, the end of maturity of the CLN can be adjusted.

At the worst the investor receives a cash settlement amount that depends on the market value of the reference debtor’s debts after the occurrence of the credit event. The market value tends to fall significantly short of 100% of face value and may also amount to zero.


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