Performance Linked Bonds listed on the Third Market of the Vienna Stock Exchange are offered through an Information Memorandum and by a separate document which is called the Terms & Conditions of the Bond. Performance Linked Bonds listed on the Emerging Market of the Cyprus Stock Exchange are offered through an Admission Documents that includes also the Terms & Conditions of the Bond. Before admission of a bond these documents must be entered for admission with the stock exchange, which contain the objective of the bond, the use of its proceeds and the bond`s terms & conditions.
Here follows a description of how the bond listing and the proceeds of the bond listing are going to be used to create a Performance Linked Bond Issue, this particular case is sometimes called Portfolio Linked Note in the industry:
SPV Company AB wishes to issue unprotected Performance Linked Bonds with the whole issue divided in 1.000 EUR face value each on a stock exchange. The bond issue is freely tradable and transferrable, but will not be offered to local investors or US Investors. The SPV company AB has opened a trading account with a bank/broker, for example at Interactive Brokers, in the name of the SPV company.
Therefore, the performance of the underlying trading account at Interactive Brokers creates the performance of the bond. The actual trading account and its account value are the “link” to the bond. As the performance of the trading account changes the value of the bond constantly, it creates thus a “performance linked bond”. The performance of the underlying trading account needs to be reported in frequent and fixed periods to the stock exchange in order to guarantee correct pricing of the bond, as the trading account and its performance is the link to the bond. An Investor wishes to buy the performance linked bond ABC for 200.000 EUR. The SPV Company AB issues now a performance linked bond at the stock exchange, divided in 200 pieces of 1.000 EUR face value each. The actually SPV company AB behind performance linked Bond ABC receives the 200.000 EUR with its bank, for example Bank of Cyprus. The SPV company AB orders its bank, Bank of Cyprus, to wire the whole 200.000 EUR to the trading account with Interactive Brokers in the name of the SPV company. The regulated Investment Manager XY will be authorized as “Authorized Dealer” for the trading account with Interactive Brokers. The regulated Investment Manager XY has an investment strategy according to which the proceeds are invested. The Investment Strategy will be made part of the Information Memorandum or Admission Document.
Let`s assume, the trading account has made some trades in the first week. Small losses of 4.000 EUR occurred, the account value of the trading account with Interactive Brokers in the name of the is now 196.000 EUR in our example. The reporting agent/calculcation agent will calculate the NAV per Bond piece and report this number to the stock exchange. The reporting agent/calculation agent reports the value for the stock exchange in order for the performance of the trading account to be recognized and therefore to create the recognized performance of the trading account as link to the “performance linked bond” through publication of the NAV per note by the stock exchange.
When profits occur on the reference asset, the NAV of the Notes will increase. When losses occur on the reference asset, the NAV will decrease.
Assume from our previous example, there is an issue of Notes with the minimum amount of EUR 200.000 and a small loss of EUR 4000 occurred on the reference asset, reducing the available balance to EUR 196.000 and we assume that there are 200 bonds outstanding with an initial NAV of EUR 1000 (original amount EUR 200.000 divided by 200 bonds, for a NAV of EUR 1000).
As each of the 200 pieces of the performance linked bond issue have a face value of EUR 1.000, each piece must be adjusted for value to keep the link between performance and the bond intact. The loss of [EUR 200.000-196.000 =] 4000 EUR is divided evenly on all pieces as follows:
Face Value plus (P&L of the underlying trading account/number of pieces of the issue) = EUR 1.000 + (-4.000/200) = EUR 980. Therefore the audited value of the performance linked bond that the reporting agent reports to the stock exchange is EUR 980.