What it is
The investor holds a note, not the shares. The note has an issuer, a maturity and a European ISIN, and its redemption amount, sometimes its coupon too, is calculated by reference to a share, a basket of shares or an index.
Who issues the note, and what stands behind it, decides almost everything else: how it pays, what can go wrong, and what the investor is really exposed to.
Two families
The bank-issued note: a payoff
A bank issues the note and hedges it with the shares and with options. What the investor buys is a payoff, chosen in advance:
Participation
The note pays a share of the rise of the equity, sometimes with leverage, sometimes up to a cap.
Capital protected
All or part of the capital is returned at maturity, in exchange for a lower share of the upside.
Reverse convertible
A high coupon, with redemption in shares or at a loss if the equity falls below a barrier.
Autocallable
Redeems early with a coupon if the equity is above a set level on an observation date.
The note is an unsecured obligation of the bank. However well the shares perform, the investor is paid only if the bank is. That is the trade-off for a payoff that can protect capital or pay a coupon the shares themselves would not pay.
The asset-backed note: the shares themselves
In the asset-backed version a securitisation compartment buys and holds the shares, and the note follows their value net of the compartment’s costs. There is no option and no protection: what the shares do, the note does. This is the structure of a tracker note on equities, and of a pre-IPO note on a private company.
The note is a limited recourse obligation of its compartment. It is backed by the shares and by nothing else, and no other compartment of the issuer has any claim on them. Under the Luxembourg Securitisation Law that segregation is statutory.
When each one fits
A bank-issued note fits an investor who wants a specific payoff on liquid shares, protection or income for example, and is comfortable with the credit of the issuing bank.
An asset-backed note fits where the obstacle is the format of the shares rather than the payoff: unlisted or pre-IPO shares a bank will not hold in custody, a position that several investors want to share, a basket managed over time, or shares a family wants to hold as a single security with its own ISIN. For unlisted companies, see also how to access pre-IPO companies .
Frequently asked questions
What is an equity-linked note?
A debt security whose return depends on the performance of a share, a basket of shares or an equity index. The investor holds a note, not the shares, and receives a redemption amount, and sometimes a coupon, calculated by reference to the equity.
Are equity-linked notes capital protected?
Some are and many are not. Bank-issued notes can be built with full or partial protection, paid for by giving up part of the upside, and the protection is only as good as the issuing bank. An asset-backed note that holds the shares has no protection: its value follows the shares, up and down.
What is the difference between an equity-linked note and a tracker note?
A tracker note is one kind of equity-linked note when its underlying is shares: it follows the value of the assets one for one, with no option payoff. Equity-linked note is the broader term and also covers structured payoffs such as participation, reverse convertibles and autocallables.
Are equity-linked notes on U.S. shares subject to withholding tax?
They can be. Under Section 871(m) of the U.S. Internal Revenue Code, notes that replicate the performance of U.S. equities closely, including delta-one notes, may be subject to U.S. withholding on dividend equivalents. The determination is made for each issuance before the issue date.
Holding shares as a note?
Tell us the shares, the size and who the investors are. We come back with an indicative structure.
Open the configuratorRelated