What Is a Credit Linked Note?

Introduction

A Credit Linked Note (CLN) is a structured debt instrument that combines the cash flows of a conventional note with an embedded credit derivative. The issuer - which may be a bank, a securities dealer, or - such as is the case with SMART - a special purpose vehicle (SPV) - packages the credit risk of a defined reference entity into a single, tradable security.

The investor lends capital to the CLN issuer and receives periodic coupon payments at a rate above what a comparable risk-free instrument would offer. The premium reflects compensation for bearing credit risk. If the reference entity suffers a defined credit event, the investor's principal is partially or fully reduced in accordance with the recovery value of the reference obligation.

From the investor's perspective, subscription is as straightforward as buying any other security: a single ISIN placed via the investor's existing bank with no new account and no special infrastructure. The CLN appears on a standard portfolio statement like any bond or equity position.

The Reference Entity

The reference entity is the party whose credit risk the CLN investor is economically exposed to. On the SMART platform, CLNs have been structured around a range of private credit opportunities: real estate transactions, bridge lending facilities, SME financing, and infrastructure-linked debt, where the reference entity is a borrower or project vehicle with a defined repayment profile. This provides investors with access to private credit instruments that would otherwise be accessible only to institutional lenders or originating banks.

Suitable CLN candidates share a common profile: a defined, assessable credit risk, a clear maturity or repayment structure, and a yield premium that compensates investors for the additional risk taken. Real estate bridge lending, SME financing, trade receivables, and infrastructure project debt are all credit risks that lend themselves to CLN structuring - assets where the underlying cash flows are identifiable and the credit story can be articulated clearly in a termsheet.

Issuer Structure

SMART CLNs are issued by Smart Edge PCC Limited, an off-balance-sheet special purpose vehicle incorporated in Guernsey as a Protected Cell Company.

As the issuing vehicle is off-balance-sheet: the assets referenced by each product are legally separate from Onvest AG and from each other. An investor's claim is against the collateral held within the relevant structure, not against Onvest AG as a corporate entity.

Credit Events

A credit event is a contractually defined trigger that activates the loss mechanism of the CLN. The ISDA framework defines the standard events: bankruptcy or insolvency of the reference entity, failure to pay a scheduled debt obligation, obligation acceleration, and restructuring. The specific credit events applicable to any CLN are set out in the product termsheet.

A credit event does not automatically mean total loss. The loss is calculated based on the recovery value of the reference obligation - the amount recovered from the defaulted entity in post-default proceedings. In many corporate credit events, recovery values range from 20% to 60% of face value, meaning investors typically recover a meaningful portion of principal even after a credit event occurs.

On the SMART platform, the product manager oversees compliance with the CLN's terms throughout its life, including the monitoring of reference entity credit quality and the orderly settlement process in the event of a credit event. Unlike an AMC, a CLN does not require the product manager to be a FINMA-regulated asset manager: because there is no active portfolio management, the regulatory threshold is lower, and unregulated entities may act as product manager subject to the terms of the platform and the product documentation.