Guide to Leveraged Loan CDS - Debt Research Credit Strategy...

Guide to Leveraged Loan CDS
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Unformatted text preview: Debt Research Credit Strategy September 28, 2006 Glen Taksler 2129332559 glen taksler@bofasecurities com Bankof America-?~ Guide to leveraged loan CDS ~ Leveraged loan CDS ("LCDS") allows investors to refer ence secured loans in standardized credit derivative contracts" With steady growth in the double- and single-B high yield universe, we look for LCDS to become popular among bank loan portfolios and hedge funds ~ One of the biggest dillerences between LCDS and senior unsecured CDS is prepayment risk, In the US, LCDS trades may terminate early if a loan facility is refinanced and not replaced In Europe, the criteria are still being finalized, but are expected to be more stringent-contracts terminate if a loan facility is refinanced, regardless of whether the f'lCility is replaced ~ LCDS increases opportunities to tr ade across the capital str ucture, In recent months, LCDS has traded cheap to the fair value spreads implied by senior unsecured CDS and assumed recovery rates, This has led to significant demand for selling protection ~ Although we look for a tr ansition to cash settlement, cun ently, LCDS physically settles" To be deliverable into an LCDS contract, an obligation must arise under a syndicated loan agreement and trade as a loan of the designated priority (first-, second-,or third-lien) The protection buyer also must be able to create participation rights for the seller Table of Contents Overview, .2 Credit Events 2 Early Termination (Cancelability) 3 Settlement, 3 Succession Language 4 European LCDS" 4 Comparing Loan CDS with Senior Unsecured CDS ' .5 LCDS - Loan Basis ,.5 Capital Structrue , 8 Unwinds, 12 LCDX ,., 13 Collateralized Loan Obligations (CLOs), 13 Special Features olLoan CDS 14 The Reference Obligation and the Secured List ' ,15 Syndicated Secured Characteristic 15 Settlement, 16 Appendix A: More on the Dispute Resolution Process 19 Appendix B: Deriving the Spread Relationship Between LCDS and Senior Unsecured CDS 20 This report has been prepared by Bane of America Securities LLC (BAS), member NYSE, NASD and SIPC" BAS is a subsidiary of Bank of America Corporation. This report is intended for sophisticated institutional investors and equivalent professionals in the fixed income market only" Please see the analyst certification and important disclosures on page 22 of this report. BAS and its affiliates do and seek to do business with companies mentioned in their research reports" As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Should investors consider this report as a factor in making an investment decision, it must be considered as a single factor only" Credit Strategy Research September 28, 2006 Bankof America <?~ This document assumes familiarity with both semOf unsecured CDS and the cash loan market For more on senior unsecured CDS, please see our Credit Default Swap Pnmer Second Edition January 5, 2006 Overview Leveraged loan CDS ("LCDS") allows investors to reference secmed loans in...
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