The student loan-backed credit linked note was a private placement offering that was only accessible for certain institutional or accredited investors.
The credit-linked note or CLN is issued by Luxembourg-based Alt Lending SPV Two LLC. This is a special purpose vehicle formed by Alt Lending LLC, a private equity-backed lender that specializes in refinancing student loans.
The investment has now been made available on the secondary market.
In this Alt Lending US student loan notes revise, we’ll focus on the features and terms of the investment. We’ll also touch on:
- Credit Linked Note Meaning
- What is a student promissory note?
- How does the Alt Lending student loan investment works?
- Advantages and disadvantages of loan notes investment from Alt Lending
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Some facts might change from the time of writing. Nothing written here is financial, legal, tax, or any kind of individual advice or a solicitation to invest.
Alt Lending US Student Loan Notes Overview
The company is using this credit linked note to seek a debt investment worth $15 million.
A portfolio of US private student loans that are in distress, past due, and in default serves as collateral.
With the CLN, investors receive top security over their student loan debt and profit directly from loan repayments.
A yearly interest rate of 13% is paid to you in semi-annual installments of 6.5%.
If there are no defaults, you will receive a single bullet repayment of your principal investment when it matures in March 2027.
What is a credit linked note?
A credit-linked note functions similarly to a bond but incorporates a credit default swap, which transfers the risk of a particular borrower to investors in exchange for higher interest rates.
What is a student loan note?
A student loan note — or promissory note — is a written or legal promise from a student to pay back a loan with interest.
This type of investment involves acquiring debt backed by student loans.
How the Alt Lending student loan investment works
Alt Lending purchases troubled student loans at a price between 15% and 50% of their face value. The borrowers on these loans have either defaulted or missed payments.
These loans have been restructured into long-term, fixed-rate repayment schemes, usually with an interest rate of 5% over a ten-year period.
The loans are actively managed for a year to improve repayment behavior, so they can be seen as performing loans.
Repayments from borrowers provide cash flow for Alt Lending. The firm has the option to sell or refinance loans at a much higher price, often 70% to 90% of the face value.
By purchasing this credit linked note, investors are effectively making a loan to Alt Lending via the SPV.
A fee equal to 0.10% of the total amount invested is assessed when you purchase the US Student Loan Credit Linked Note.
How to Invest in US Student Loan Credit Linked Note
- Speak with your broker, investment advisor, or relationship manager.
- Verify eligibility and access to counterparties; not all banks or brokers may have instant access.
- Request pricing from the trading desk.
- The transaction is settled.
- The note is added to your portfolio and interest begins to accrue.
This note was initially only available to investors through private placement, either straight from Alt Lending or via specific financial intermediaries.
Due to its recent entry into the secondary market, qualified investors can now trade it.
Euroclear, Bloomberg, and Clearstream support the trading of the notes.
Its reach has expanded as it is now accessible through more than 550 international counterparties, including UBS, Julius Baer, BNP Paribas, and others.
While this note is meant to be held until maturity, new investors can purchase without going through Alt Lending directly. If current investors want liquidity, they can dispose their notes before that period.
The investment is still largely targeted at institutional investors and high-net-worth clients through private banking, brokerage, and investment custodians.
Advantages and disadvantages of loan notes from Alt Lending
Should Alt Lending face financial woes, investors are protected by the SPV structure, as it guarantees that the portfolio is separate from the company’s core operations.
The coupon rate of 13% per year is much higher than that of conventional fixed-income investments.
Rather than being locked in until 2027, investors can now leave the market sooner if they wish.
However, the price you get may be higher or lower than what you initially invested if market demand, interest rates, and the perceived risk of the underlying loan portfolio are taken into consideration.
The secondary market for credit-linked notes is usually less liquid than that of public acciones o bonos. You might have to settle at a discount in order to sell, or you might not find a buyer right away.
Despite being accessible on the secondary market, it still lacks the liquidity of securities that are publicly traded.
Moreover, should interest rates rise sharply globally, the fixed 13% coupon might lose appeal.
All principal is supposedly paid back at maturity. A default on such repayment is possible if the portfolio does not perform as anticipated. A complete default and 100% loss for investors is unlikely
CLNs are also less transparent than traditional bonds, and you must rely on the reporting and valuations of the issuer.
While it offers solid returns, those willing to accept higher risk and are aware of what those risks are should consider it.
In short, it’s a high-yield, high-risk investment. However, on a risk/adjusted return basis, this can be a good option for some people’s portfolios.
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Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
