Equity-linked notes (ELNs) are a type of structured financial product that combines features of both equity and debt. They’re essentially debt instruments, like bonds, but their return is tied to the performance of a specific underlying equity or an equity index.This hybrid nature makes them an interesting tool for investors and issuers alike.
How ELNs Work
An ELN’s structure typically involves an issuer (like a bank) selling a note to an investor. The note has a set maturity date and a principal repayment amount. The key feature, however, is that the final payout to the investor is not a fixed interest payment. Instead, it is linked to the performance of an underlying asset, such as a single stock (e.g., Apple), a basket of stocks, or an equity index (e.g., S&P 500).
The terms of an ELN can vary widely. For instance, a common structure might offer a contingent coupon that pays out only if the underlying stock’s price remains above a certain level. If the stock falls below a predetermined “knock-in” or “barrier” level, the investor might receive the principal back in the form of a pre-agreed number of shares of the underlying stock, rather than cash. This means the investor bears the risk of the stock’s depreciation.
Alternatively, some ELNs are designed to provide investors with full exposure to the underlying equity or portfolio. In this case, the redemption amount is directly tied to the realizable value of the underlying equity. This structure, while formally a debt security, functions more like a direct equity investment. This can be particularly useful for issuers who want to create a debt instrument for specific regulatory or accounting purposes, even though the economic exposure is purely equity. This kind of “name mismatch” is generally reserved for private offerings to professional investors.
The Utility of ELNs
For investors, ELNs offer a way to participate in the potential upside of an equity market with a degree of principal protection, depending on the note’s structure. They can also provide a more diversified exposure to a specific stock or sector than simply buying shares directly. This can be attractive for investors who are looking to manage risk while still seeking growth. Additionally, some ELNs can be a way to generate income in a low-interest-rate environment through their contingent coupon payments.
For issuers, ELNs are a flexible way to raise capital while transferring some of the risk of the underlying equity to investors. Banks and financial institutions can use them to create customized investment products that meet specific investor demands. The ability to create a debt “wrapper” for an equity-linked investment can be especially valuable for regulatory reasons, allowing issuers to manage their balance sheet and capital requirements more efficiently. This flexibility in structuring is a key reason why ELNs have become a significant part of the structured products market.
Tiner Wernow (formerly John Tiner & Partners) designs and creates securities and other financial instruments that help clients raise capital, sell managed trading strategies, and securitize various assets.
We offer a complete, full-cycle service, from developing the initial structuring concept to its full implementation, which includes acquiring an International Securities Identification Number (ISIN), handling issuance, global clearing, exchange listings, and placement routes. We can transform any asset or investment idea into an easily tradable and globally cleared security.
Our global services platform, 208Markets, provides issuance, brokerage, and SPV maintenance services across multiple jurisdictions.
Additionally, we’ve created educational materials under the “Tiner Educational Hub” to help professionals understand the securitization tools available to achieve their business objectives more efficiently.
