The Tracker Bond market has seen a new trend of late where credit linked notes are being used to provide the “capital protection” for investors at maturity. These types of products are deemed too risky for Credit Union investments, so retail investors and the likes of charities need to be cogniscent of the inherent risks associated with some of these types of products.
Credit Linked Notes or Bonds are not 100% Capital Protected in the traditional manner that tracker bond investors in Ireland are familiar with. There are two main reasons for this:
- Investors are exposed to creditworthiness of the issuer of the product AND the credit risk within the product
- Credit Linked Investments introduce a different type of exposure insofar as the actual credit instrument being used to provide the capital protection at maturity may experience a “credit event” before the maturity date.
Due to this complexity and the potential for capital loss, most European Structured Product providers describe Credit Linked investments as “Capital at Risk” rather than “Capital Protected”. This begs the question as to why these financial products can be marketed here in Ireland as “Capital Protected”!
This is a complex area and a lack of research before committing to a product could lead to a catrosphic outcome for investors. I think it is important that these issues are clearly outlined before any investor commits to a specific product.
Contact us here at Metis before committing your funds to a Tracker Bond.
Co-Founder & Director
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