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Erste Group CREDEA bonds (credit linked notes)

What is a CREDEA bond (credit-linked note)?

A CREDEA bond is a bond that hinges on a credit event. More specifically, the redemption, and also the coupon, depends on the occurrence of one credit event at one underlying referential debtors. The annual coupon is paid out as long as the referential debtor has not incurred a credit event. CREDEA bonds are also known as credit-linked notes (CLN).

What is a credit event?
Possible defined credit events are, depending on the terms of the bond, for example the insolvency of the referential debtor, default, premature call-ins of debt, disruptions to the servicing of debt, non-acknowledgement/moratorium, and restructuring.

How does a CREDEA bond (credit-linked note) work?

The investor buys a CREDEA bond and receives an attractive coupon throughout the life of the bond as long as no credit event occurs at the referential debtor. If a credit event occurs, the bond is redeemed prematurely. In that case the investor receives compensation in cash instead of the capital invested. Said compensation equals the market value of the respective referential debt. However, in this scenario investors will in all likelihood only receive a part of the principal back, or they may even incur a total loss (i.e. capital and interest).

The settlement of bonds where a credit event has occurred depends on the timeline of the credit event resolution process of the ISDA (Credit Derivatives Determination Committee) with regard to the referential debtor and the credit event.

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