Loan participation notes (LPNs)
In terms of function and investor risk,
LPNs are no different
from "normal bonds". In return for the loaned capital (nominal amount), the
issuer makes interest payments at regular intervals, and the
bond is repaid at par on
maturity.
However, unlike normal bonds, LPNs involve a tripartite relationship: usually, a bank
acts as the issuer ("legal issuer") vis-à-vis the investor, but from
an economic standpoint, the actual borrower is another company ("economic
issuer"). This company indirectly obtains debt capital in the marketplace via the legal
issuer. The bank (legal issuer) issues LPNs for the sole purpose of financing the loan it has
granted to the company (economic issuer).
The legal issuer receives the economic issuer's interest and capital payments and guarantees
that it will pass these payment flows on to the investor.
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