Credit Linked Certificate

What are Credit Linked Certificate?

Credit Linked Certificates are financial instruments that offer investors the opportunity to achieve regular premiums related to the ability of one or more companies, called Reference Entity, to meet its obligations. These amounts, called periodic premiums, are only paid if there are no credit events affecting the reference entity during the life of the Certificate. A credit event can be, for example, failure or non-payment of coupons or debt restructuring of one or more reference entities of the Certificate. Additionally, in the event of a credit event, the capital protection is lost and at maturity the investor will receive only a percentage of the issue price of the Certificate. Credit Linked Certificates expose the investor to both the solvency risk of one or more reference entities as well as the issuer risk that characterises all Certificates.

Who are Credit Linked Certificates suitable for?

Credit Linked Certificates are products that can meet the needs of investors who wish to have a periodic coupon payment and who have positive expectations of the strength of the underlying of the Certificate.

Investment products linked to a "Reference Company" that offer a periodic premium conditional to their solvency

Listing and trading of Credit Linked Certificates

The Credit Linked Certificates are financial instruments that can be bought or sold, in Italy, on SeDeX or EuroTLX, Multilateral Trading Facilities of the Italian Exchange. Methods and trading hours of such multilateral trading facilities are specified in the relevant Rule books, available on the website of the Italian Exchange. For example, trading in the continuous phase may take place on the open market days from 9:05am to 5:30pm on SeDeX and from 9:00am to 5:30pm on EuroTLX..

Features of Credit Linked Certificate

The price evolution of Credit Linked Certificates is linked to the creditworthiness of the underlying asset. The Credit Linked Certificates have the following features:

MATURITY: The date on which the Certificate ceases to belong to the
ISSUER: i.e. the financial intermediary that issued the Certificate
MINIMUM LOT: the minimum number of Certificates that can be bought and sold;
ISIN: the alphanumeric code that uniquely identifies the financial instrument;
REFERENCE ENTITY: one or more companies or trans-national organisations on which the Credit Linked Certificate has been issued;
CREDIT EVENT: An event such as a failure, missed coupon payments or debt restructuring of one or more companies underlying the Certificate which causes the protection of principal and payment of periodic premiums to cease.
PERIODIC PREMIUM: The pre-determined and periodic payment due to the investor in the event no credit event has occurred;
MATURITY MINIMUM PAYMENT: The minimum percentage of the issue price of the Certificate that will be redeemed at maturity in the event of a credit event;
ACTUAL RECOVERY: The actual value due to the investor and determined by the market- ex post on occurrence of credit events.

Operation of the Credit Linked Certificate

Credit Linked Certificates redeem to the investor, in the course of their life, a recurring coupon which was fixed at the time the Certificate was issued. This periodic premium is paid if there have been no credit events in respect of the reference entity during the life of the Certificate. Credit events may be, for example, the bankruptcy of the entity to whom the Certificate relates, bankruptcy or the start of other insolvency proceedings and/or liquidation, restructuring of the company debt, namely the extension of the maturity and/or modification of the coupon profile, and non-payment of creditors. At maturity of the Certificate, and in the absence of a credit event, the investor, in addition to premiums paid over the life of the Certificate, receives the return of the issue price of the Certificate. In the case of a credit event, the investor at maturity has three different possible pay-offs based on the features specified and fixed at the time the Certificate was issued according to the type of recovery:

Present Recovery: The investor receives a predetermined amount during the issue of the Certificate. The amount set is identified as a percentage of the issue price of the Certificate.
Actual Recovery: The investor obtains a recovery, determined by the market ex post in respect of the occurrence of a credit event.
Zero Recovery: At maturity the investor does not receive any payment, not even in part, for the issue price of the Certificate.

In the case of Credit Linked Certificates on a basket of companies on the occurrence of one or more credit events the Certificate reimburses a variable rate subject to the credit event affecting only one, more than one or all of the underlying Reference Entity of the Certificate.

Example of how Credit Linked Certificates operate

Assuming a Credit Linked Certificate has a particular company as a Reference Entity. The Certificate is issued on July 21, 2014 with an issue price of 1.000 Euro, with a 3-year term and an annual premium equal to €48,50 minimum payment at maturity upon the occurrence of a credit event set at 60% of the issue value of Certificate. The possible scenarios for the investor are:

During the life of the Certificate no credit events occur in respect of the Reference Entity. The investor, having spent 1.000 Eur buying the Certificate when it was issued, receives the following flow:
- July 21 2015: proceeds of 48,5 Eur;
- July 21 2016: proceeds of 48,5 Eur;
- July 21 2017: proceeds of 48,5 Eur + 1.000 Eur (the return of the issue value of the Certificate).
In the Certificate's second year a credit event occurs affecting the Reference Entity. The investor, having spent 1.000 Eur buying the Certificate when it was issued, receives the following flow:
- July 21 2015: proceeds of 48,5 Eur;
- July 21 2016: no proceeds;
- July 21 2017: proceeds of 600 Eur.
In the first year of the Certificate a credit event occurred that affected the Reference Entity. The investor, having spent 1.000 Eur buying the Certificate when it was issued, receives the following flow:
- July 21 2015: no proceeds;
- July 21 2016: no proceeds;
- July 21 2017: proceeds of 600 Eur.

For further information on the terms you can consult the appropriate section GLOSSARY

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