Credit Linked Notes (CLNs): Enhanced Returns via Private Assets

Introduction

Fixed-income investors are often in search of higher yields without compromising on security and legal robustness. Credit Linked Notes (CLNs) have emerged as an attractive solution. CLNs are financial instruments that link investor returns to the performance of an underlying asset (such as a loan or project) while providing a bankable form for these private-market assets​. By packaging private debt (e.g. real estate backed loans) into tradable notes, CLNs offer access to yields from private projects that typically go well beyond the reach of traditional bonds. This report explains the purpose and structure of CLNs and illustrates why they inspire trust among investors and asset managers, particularly under the strong legal frameworks of highly reputable jurisdictions.

What is a Credit Linked Note and How Does It Work?

A Credit Linked Note (CLN) is a fixed-income security that allows the issuer to transfer specific credit risk of a borrower, or of a portfolio of assets, to the investors​. In essence, the CLN investor is lending to a reference borrower, via a Special Purpose Vehicle (SPV) in exchange for an enhanced coupon. The issuer arranges this by contractually linking the note to a loan or other asset. The issuer receives regular interest payments from the borrower, and investors receive regular coupon payments, typically substantially higher than comparable bonds, in return for accepting exposure to the performance of a specific asset​​. If the underlying borrower performs without default, the CLN pays full interest and returns principal at maturity. In the event of a default by the reference borrower, the issuer pursues the debt on behalf of the CLN investors to ensure the maximal payoff on the CLN investment. The relationship between the parties is memorialized in a transparent contractual framework​. This structure offers borrowers an organized venue to raise capital, while giving investors a chance to earn a premium yield for providing it. In summary, a CLN functions much like a bond “wrapped” around a loan’s credit risk: it monetizes a private loan into a bankable “note” or “certificate” which is assigned an International Securities Identification Number (ISIN) and is cleared on a recognized central clearing system such as SIX, Clearstream or Euroclear.

Financial Structure: Issuer SPV, Investors, and Borrower

At the heart of a CLN transaction is a Special Purpose Vehicle (SPV) acting as the issuer. The SPV is a standalone entity that intermediates between the investors who fund the note and the underlying borrower who needs capital. Transparent contractual framework ring-fences the deal’s assets and liabilities, ensuring the investors’ risk is confined to the specific loan or project rather than any other exposures of the issuer​. This isolation via an SPV is deliberate – it ensures the ring-fencing of any business risks associated with any financial institution.

The basic flow is as follows: investors purchase the CLN, and their invested capital (the note proceeds) is channeled into a loan or funding to the borrower through the SPV. The borrower in turn commits to pay interest and ultimately repay principal on that loan to the SPV, under terms mirrored by the CLN. The SPV collects these loan payments and passes them through as coupon interest and redemption amounts to the CLN holders​.

Figure: Simplified CLN Structure.

The Issuer SPV stands between CLN investors and the borrower. Investors contribute the loan amount by subscribing to the CLN, and the SPV loans this capital to the borrower. Over the life of the note, the borrower’s interest payments and principal installments flow back to the SPV, which uses them to pay periodic coupons to CLN investors. Upon maturity (or early repayment) of the underlying loan, the borrower’s repayment is funneled through the SPV to redeem the CLN, returning principal to investors​. This structure effectively transforms a private loan into a tradable note, allowing multiple investors to participate in the funding of a single loan or portfolio of assets​. The SPV administers the cash flows and legal rights, ensuring investors have a claim to the cashflows generated by the underlying asset. Importantly, the SPV structure also isolates and protects investors: it limits exposure to only the designated reference asset/borrower, insulating investors from other issuer credit risks​. In case the borrower defaults, the loss is borne by the CLN investors (as the note value would reflect the loan’s recovery value), but otherwise investors receive all due interest and principal per the note’s terms. Thus, the capital and risk flow from investors to the project and back are tightly controlled via the SPV, providing clarity and legal enforceability for all parties. The relationship between the SPV and the investors is transparent and governed by a standardized Terms and Conditions document.

Dual Role of CLNs: Benefits for Investors and Entrepreneurs

CLNs are versatile instruments that serve a dual purpose, bringing advantages to both the investors (and their asset managers) and the borrowing entrepreneurs or project sponsors:

(a) Enhanced Returns for Investors and Asset Managers

Asset managers can leverage CLNs to offer their clients higher-yielding, bespoke fixed-income products that would be hard to achieve with standard bonds. Key attractions for investors include:

• Access to Private Debt Markets: CLNs grant investors exposure to private market assets (such as real estate developments or privately-held business loans) in a bankable format. Through a CLN, an investor can tap into the private debt market, an asset class that is less correlated with public markets​, thereby improving portfolio diversification. For example, construction projects loans can be accessed via CLNs​, which would otherwise be inaccessible to bond investors.

  
  

• Enhanced Yields: Because borrowers typically have access to profitable investment opportunities, but have no access to cheap financing, then the CLNs typically pay a premium coupon. Yields on CLNs are much higher than those of traditional corporate bonds of similar tenor​, reflecting the increased profitability of the underlying project and inaccessibility to cheap financing. Furthermore, the CLN structure is cost-efficient – compared to issuing a public bond or setting up a fund structure, it involves leaner documentation and lower setup costs – allowing more of the borrower’s paid interest to pass through to investors as yield​. In short, investors are compensated with attractive returns for providing financing through the CLN.

  
  

• Liquidity and Tradability: CLNs are issued by SPV domiciled in highly reputable jurisdictions. Once issued, a CLN comes with an ISIN code and is held as a security, making it tradable and bankable, and provides for periodic price publication​. Investors can buy or sell CLNs through their custodian banks just as they would trade a bond or stock, by using the ISIN to place orders​. This provides a degree of liquidity and transparency that direct loans lack – an important consideration for asset managers who may need to mark-to-market positions.

  
  

• Professional Due Diligence and Standardization: Typically, an experienced arranger or asset manager structures the CLN and conducts due diligence on the underlying borrower/project​. Investors thus benefit from a standardized credit analysis and documentation process, rather than having to vet a private loan on their own. The CLN consolidates multiple investors into one instrument and applies consistent underwriting standards, reducing information asymmetry​. For the investor, this institutional approach, combined with clear payment terms, inspires confidence that the product is professionally managed.

In practice, asset managers use CLNs to create tailored fixed-income products – for example, a CLN linked to a real estate backed loan – giving their clients an opportunity to earn double-digit annual coupon that is paid quarterly, secured by a real asset, and denominated in the client’s home currency. This ability to customize currency, tenor, and structure is a notable advantage; the CLN’s terms can be structured independently to match investor preferences​, including being issued in the home currency to eliminate FX risk.

(b) Alternative Funding Avenue for Entrepreneurs

For borrowers such as entrepreneurs, real estate developers, or growing businesses, CLNs provide a flexible financing tool that complements traditional bank loans and allows access to capital when bank financing is not possible, at a substantially lower funding costs than what it would cost to borrow the money from private money lender. Key advantages on this side include:

• Access to Capital and Better Terms: A CLN allows an entrepreneur to raise debt funding from a pool of investors, when conventional bank financing is not a feasible option. In many cases, bank lending are extremely restrictive for such projects due to high and increasing capitalization requirements imposed on the banks. The banks are often subject to other strict criteria which relate more to the banks’ regulatory setting and internal policies than to the actual credit risk of the borrower or project​. By contrast, arranging a loan via a CLN can result in better access to capital to the borrower and often much higher risk-adjusted returns to the investors​. The borrower might secure a competitive interest rate or larger loan amount, since the CLN structure reduces intermediaries and taps into investor appetite for yield. Essentially, the CLN route can fill financing gaps where banks and other professional lenders might be reluctant.

  
  

• Flexibility and Speed: Issuing a CLN can be faster and more flexible than navigating a bond issuance or complex bank loan approvals. The legal documentation for a CLN is leaner and the setup costs are substantially lower than for a public bond​. This lean structure means an entrepreneur can potentially execute a financing in 1-2 weeks rather than wait months. Moreover, the CLN can be tailored in size, duration, and amortization to fit the project’s needs (e.g. a 2-year note that aligns with a construction timetable). Such speed and customization are invaluable for project sponsors who need timely funding – for example, securing a land purchase quickly via a CLN-funded loan, then refinancing with a bank after permits are obtained.

  
  

• Scalability through Multiple Investors: The CLN framework enables pooling multiple investors into one loan​. Rather than negotiating with a single lender for a large sum, an entrepreneur can access numerous investors collectively. The SPV issuer consolidates these contributions, so the borrower deals with one loan agreement. This can increase the achievable funding amount and diversify the funding sources. It also means that an asset manager or arranger can tap their network of investors to fund the entrepreneur’s project, effectively matchmaking capital to opportunities. For business owners, this is a way to reach a broader investor base without the complexity of dealing with each investor individually – the CLN structure does that aggregation seamlessly.

  
  

• Preservation of Ownership and Project Control: Because CLNs are debt instruments, the entrepreneur raises capital without diluting equity ownership (unlike bringing in new equity investors). For real estate developers, this means financing development costs through debt while keeping the upside of the project’s profits. The terms of the CLN loan can be crafted to suit project cash flows (e.g. interest roll-up during construction, etc.), providing breathing room until the project generates income. Essentially, CLNs offer a bridge to future refinancing or sale, with the legal clarity of a fixed-income instrument.

  
  

• Profit Participation. Alternatively, a CLN can be designed as a hybrid instrument and linked to a profit-participating loan, which allows investors to participate in the project’s upside in addition to earning interest at a basic rate.

In summary, CLNs create a win-win: asset managers deliver an innovative product with enhanced returns to their clients, and entrepreneurs obtain critical funding under workable terms. This dual utility underpins the growing popularity of CLNs for financing assets like real estate developments and private company expansions in a secure, regulated manner​.

Legal and Institutional Safeguards in Reputable Jurisdictions

A crucial aspect of CLNs’ appeal is the strong legal and regulatory framework supporting them, particularly when structured through SPVs domiciled in highly reputable jurisdictions. Investors can take comfort that these notes are issued and administered in highly reputable jurisdictions known for rigorous rule of law, exceptional professionalism, well-informed and experienced courts, and fast and efficient conflict resolutions.

One notable dispute resolution forum available to parties involved in CLNs is the Swiss Arbitration Centre in Zurich, Switzerland, which offers an efficient, flexible, and internationally respected arbitration mechanism. The Swiss Rules of International Arbitration provide a comprehensive framework for resolving disputes swiftly, confidentially and at a predictable cost. Proceedings are typically faster and more cost-effective than traditional litigation, and the process emphasizes neutrality, fairness, and predictability of outcomes. This trusted forum gives both investors and borrowers additional confidence that any contractual disagreements can be resolved impartially and with legal certainty grounded in robust legal framework. Investors can take comfort that these notes are issued out of, and administered in, highly reputable jurisdictions.

Robust Issuer Structure: The CLN is typically issued by an SPV formed in a finance-friendly jurisdiction due to their stable legal systems and institutional trustworthiness and to take advantage of efficient securities and tax laws. Importantly, using an independent SPV insulates the transaction from other business risks. The SPV holds the loan asset and issues the notes, but it has no other operations – this segregation of assets means that note holders are only exposed to the performance of the underlying loan, not to any corporate credit risk of a parent company​. Such a structure is commonly termed orphan or ring-fenced, and it limits investors’ exposure solely to the reference asset’s risk, a key element in building trust​.

Regulatory Framework and Oversight: The legal regimes in highly reputable jurisdictions ensure CLN issuances are conducted professionally and transparently. When structured notes like CLNs are offered to the public then a prospectus must be reviewed and approved by the reviewing body which ensures that it fully discloses the issuer, terms, and risks​. This prospectus requirement ensures that even complex products meet high standards of transparency and investor information. Even when CLNs are placed privately to qualified investors – and the prospectus requirement is waived – the spirit of these regulations – clear documentation and fair marketing – is typically upheld by reputable arrangers.

The jurisdiction’s exceptional sovereign credit rating reflects its political and economic stability, and its legal order is highly predictable​ – all contributing to confidence when it is the chosen domicile for an SPV. This unique position means an SPV in a reputable jurisdiction can seamlessly interact with financial infrastructure while operating under harmonized laws. For example, an issuer domiciled in a reputable jurisdiction can readily obtain an ISIN for the CLN and clear the securities through national or international clearing systems, achieving the “bankable” status​.

Bank-Level Custodianship and Trust: CLNs are typically held in custody at regulated banks. Paying agent banks handle issuance, payments, and custody linkage. The paying agent bank facilitates the issuance of the CLN units by the SPV to investors as a bank-to-bank transactions, which are cleared through a central clearing system such as SIX, Clearstream or Euroclear. This infrastructure ensures that the settlement of securities is seamless, transparent and secure. Once the CLN is issued, investors typically hold the notes in their custody accounts at established banks or brokers, just like any other security. A regulated paying agent (often a a highly reputable bank) will facilitate the creation of the note with an ISIN, link it to the central clearing systems (SIX, Euroclear, Clearstream) for settlement, and ensure coupons and redemption payments are seamlessly processed to noteholders. The paying agent also facilitates price quoting for the CLN units and facilitates the periodic updating of the valuation of live CLNs​. These operational safeguards mean that investors receive the same treatment as holding a bond – interest payments arrive via their bank, and the security appears in their portfolio statements – reinforcing the sense of normalcy and security. Moreover, assets and accounts related to the CLN program are held on a segregated basis​. To facilitate the transparent and secure management of cash flows associated with each CLN and its corresponding underlying loan, a segregated bank account is established bearing a unique International Bank Account Number (IBAN). This dedicated account structure ensures that all incoming and outgoing funds — whether from investor subscriptions, borrower interest payments, or principal redemptions — are clearly traceable and separated from the SPV’s other activities. It enhances investor protection by maintaining an unambiguous audit trail and preventing any commingling of funds, while also simplifying reconciliation and reporting across the lifecycle of the CLN.

Cross-Border Legal Enforceability: An important question for investors is how their rights are enforced if something goes wrong. With SPV structures domiciled in reputable jurisdiction, investors benefit from strong legal recourse. Typically, the CLN’s terms and conditions (the note contract) will specify the governing law and dispute resolution forums. Thanks to the well-integrated legal systems, the Issuer can always effectively enforce claims against borrowers thanks to reciprocal arrangements to recognize and enforce civil judgments directly between jurisdicitons. In other words, if the Issuer obtains a judgment against a borrower in the Issuer’s jurisdiction then a court in the borrower’s jurisdiction will honor and execute that judgment without relitigating the issues. This treaty-based enforceability across jurisdictions provides a layer of comfort that legal rights will be upheld internationally. Additionally, highly reputable jurisdictions are signatories to the New York Convention for arbitration awards​, so if disputes are arbitrated, e.g., in the Swiss Arbitration Centre in Zurich, those awards are enforceable globally. Finally, the institutional players involved (law firms, trustees, notaries, paying agents) are themselves regulated or bound by professional standards. For instance, any offering documents are prepared by reputable law firms and the legal basis for the operation of the SPVs in each jurisdiction is documented in extensive legal memorandums. These layers of professionalism and oversight create a trustworthy ecosystem around CLNs, giving investors confidence that the product is not only high-yielding but also properly safeguarded by law.

Safeguards in Real Estate Transactions (Notarial Oversight)

Since many CLNs are linked to real estate projects, it is important to highlight the legal safeguards inherent in real estate transactions. The property law systems in highly reputable jurisdictions are robust and secure, largely thanks to the role of the public notary and the land registry. Any purchase or sale of real estate must be executed as a notarized deed and registered with the cantonal land registry to be legally valid​. The notary – an impartial public official in this context – ensures the contract’s legal compliance, verifies the identities and consents of parties, and explains the fiscal and legal implications to them. For a CLN-financed real estate project, this means that when the project company or borrower acquires the land or property, a notary oversees the transaction and formally records the new ownership. Investors can take comfort that the property is duly registered as an asset of the project (or secured for the loan), and no hidden defects in title can arise – the land registry entry is authoritative proof of ownership and any liens.

Furthermore, if the CLN structure involves the loan being secured by a mortgage on real estate (which is often the case), the notary is again a central figure. The mortgage agreement (Pfandvertrag) must be signed by the borrower and lender and publicly notarized​. The notary then facilitates registration of that mortgage lien in the land registry against the property. Critically, the lender (in our case, the SPV on behalf of CLN investors) will only disburse the loan once they have confirmation that the mortgage is registered on title​. This process provides legal security: the mortgage gives the CLN investors a secured claim on the property as collateral. In the event of default, the mortgage can be enforced (through a simple legal process), and the proceeds from selling the property would go to repaying investors. The presence of a notary in these steps means there is an independent legal professional attesting to the validity of the loan security. It’s also worth noting that notaries in reputable jurisdictions are subject to supervision and carry professional liability – adding another layer of assurance that everything is done by the book.

For more complex security arrangements—such as those designed to secure the flow of funds against the borrower’s performance of specific obligations or to enable the automatic transfer of collateral in case of default — a notary or an independent trustee is often involved. These professionals ensure the proper structuring, execution, and enforceability of such mechanisms, adding a further layer of legal certainty and investor protection.

In practical terms, when an investor considers a CLN tied to a real estate, they can expect that: the land purchase was completed via a notarized deed (ensuring the borrower legitimately owns the land), and that loan made by the Issuer is secured by a registered mortgage (ensuring they have legal recourse to the asset). These safeguards, mandated by law, significantly de-risk the transaction from a legal standpoint. The transparency of the land registry (which is public record), and the formalities of notarization, help prevent fraud and ensure that investors are not financing a project with unclear ownership or encumbrances. Thus, the public notary system and real estate collateral process in reputable jurisdictions provide a strong safety net, reinforcing the trustworthiness of CLNs which are secured by property.

Conclusion

Credit Linked Notes have proven to be a compelling instrument for those seeking enhanced fixed-income returns while maintaining robust legal protections. By structuring private loans (such as real estate backed loans) into CLNs, asset managers can offer clients the best of both worlds: the higher yields and diversification of private debt, with the liquidity and convenience of a bankable and transferrable note. At the same time, entrepreneurs gain access to flexible funding that can jump-start valuable projects. The attractiveness of CLNs to investors is amplified by the solid foundations of jurisdictions in which the SPVs are domiciled – from the security of notarized real estate transactions and enforceable collateral, to the professionalism of service providers ensuring everything operates transparently and correctly. Investors are effectively partnering in private ventures through a trusted, structured vehicle rather than taking unstructured risks.

In a climate where interest rates and bond yields have been historically low, CLNs stand out as an innovative solution to boost returns without venturing outside a well-trusted framework. The use of an SPV, governed by the laws of reputable jurisdictions and enhanced by an institutional framework, means investors can participate with confidence. Every component – legal structure, deal design, flow-of-funds and legal enforcement – is designed to inspire trust. As a result, Credit Linked Notes have earned their place in the toolkit of modern fixed-income investing, unlocking private market opportunities in a form that aligns with the high standards expected by asset managers and their clients. The message is clear: with CLNs, one can reach for higher yields grounded in legal integrity, making them a persuasive proposition for the discerning fixed-income investor.