Thank you for watching! We plan on updating our entire video library in our Study Planner on our website this year, so we will also be adding updated videos to our CZcams channel. :)
I thought the issuer of the CLN is most of the time going to issue a CDS (sell a CDS) to finance the payment of the coupons above market rate to the CLN buyer. Isn't that right?
in essence, CLNs are developed for those who are regulated not to trade CDSs. Regardless cash or synthetic, a CLN issuer receives cash upfront and uses the proceeds to obtain facilities that mimic the payments of the reference asset. So, the payment upon no default should be LIBOR + CDS premium, roughly equal to the coupon of the reference asset. moreover, i don't get the part you said about "lower rate when downgraded."
assuming all facilities pay fixed rates, of course the rate stays the same over the entire period until maturity. The buyer might get disadvantaged compared to the market rate, but unless it defaults, the rate doesn't change. it's more puzzling when assuming all facilities pay floating rates. the rate then should be higher when downgraded! So, when you say :"lower rate when downgraded," what do you base your statement on?
What does it mean: 'above market rate' ? Does the CLN issuer have to pay more than the reference bond coupon if there is no downgrade? If yes, then this downgrade or even default of the reference company is beneficial for the Bond owner. So what's the use of all these things for the system?
I think it's in the fact that the default risk and counterparty risk are transferred, i.e., it's not about profit but mitigating the risk. It can happen when a financial institution does not want to liquidate the position on the bond but doesn't wanna risk losing the principal when things go south, e.g. credit downgrade makes the bond owner lose confidence in the issuer's ability to pay.
Great explanation! I had to go to a video from 2008 to clearly understand this security
He says the note holder gets"Par value minus recovery" isn't it "par - LGD"?
Thanks David for brief yet thorough explanation on CLN. Any updated videos as all the videos seem fairly aged.
Thank you for watching! We plan on updating our entire video library in our Study Planner on our website this year, so we will also be adding updated videos to our CZcams channel. :)
Really useful and clear
I thought the issuer of the CLN is most of the time going to issue a CDS (sell a CDS) to finance the payment of the coupons above market rate to the CLN buyer. Isn't that right?
in essence, CLNs are developed for those who are regulated not to trade CDSs. Regardless cash or synthetic, a CLN issuer receives cash upfront and uses the proceeds to obtain facilities that mimic the payments of the reference asset. So, the payment upon no default should be LIBOR + CDS premium, roughly equal to the coupon of the reference asset. moreover, i don't get the part you said about "lower rate when downgraded."
The audio does not work for me
assuming all facilities pay fixed rates, of course the rate stays the same over the entire period until maturity. The buyer might get disadvantaged compared to the market rate, but unless it defaults, the rate doesn't change. it's more puzzling when assuming all facilities pay floating rates. the rate then should be higher when downgraded! So, when you say :"lower rate when downgraded," what do you base your statement on?
This sounds an awful lot like a synthetic CDO. How is it different? Awesome video by the way.
What does it mean: 'above market rate' ? Does the CLN issuer have to pay more than the reference bond coupon if there is no downgrade? If yes, then this downgrade or even default of the reference company is beneficial for the Bond owner. So what's the use of all these things for the system?
Does the bond owner mean an amortized loan for the construction of a factory or the need for working capital, for example?
So buying CLN is equal (more or less) to Selling a CDS? Can CLNs be shorted?
How does the bond owner benefit in this case?
I think it's in the fact that the default risk and counterparty risk are transferred, i.e., it's not about profit but mitigating the risk. It can happen when a financial institution does not want to liquidate the position on the bond but doesn't wanna risk losing the principal when things go south, e.g. credit downgrade makes the bond owner lose confidence in the issuer's ability to pay.