I can't get the whole concept of CLN.
As I understood, CLN are securities issued primarily by SPE/SPV that pool some sort of cash stream generating assets (mortgage, loans, bonds, ABS, etc) from some reference name and promise to stream those cash flows to the investors, who would subscribe to CLN securities. Investors buy CLN through market underwriters via subscription (like in case of normal IPO of debt/equity securities), paying upfront the PAR value to the CLN-issuer. Since PAR value is paid in upfront, CLN are called also as"funded" form of CDS.
CLN-issuer in this case is credit protection buyer, and investors are credit protection sellers.
What I do not understand is what happens next?
As I understood, CLN are securities issued primarily by SPE/SPV that pool some sort of cash stream generating assets (mortgage, loans, bonds, ABS, etc) from some reference name and promise to stream those cash flows to the investors, who would subscribe to CLN securities. Investors buy CLN through market underwriters via subscription (like in case of normal IPO of debt/equity securities), paying upfront the PAR value to the CLN-issuer. Since PAR value is paid in upfront, CLN are called also as"funded" form of CDS.
CLN-issuer in this case is credit protection buyer, and investors are credit protection sellers.
What I do not understand is what happens next?
- What they will do with proceeds from CLN-issue (par value received from investors) ? Invested into risk-free securities (US treasuries/Govern bonds)? Or left aside to cover the losses at default?
- What will happen in case of default of reference name? What is payoff and how it is distributed,
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