Loan participation note

In terms of their functioning and investment risk, LPNs are comparable to an investment in “normal” bonds. In return for the investor’s commitment of capital (nominal amount), the issuer makes regular interest payments and, at maturity, the note is repaid at par.

However, in contrast to “normal” bonds, there is a three-party relationship involved in an LPN: normally, a bank is deemed to be the “legal issuer” from the investor’s standpoint; however, the actual borrower is some other company in the background (the “commercial issuer”). That company obtains its debt financing from the legal issuer indirectly in the marketplace, in that the latter issues LPNs for the sole purpose of financing the loan that has been granted to the former.

The legal issuer deposits the capital repayments and interest payments in a segregated account secured against bankruptcy and guarantees that investors are entitled to these cash flows.