One characteristic that both the ABS and leveraged loan markets share – apart from having had a hideous time over the past nine months – is that fledgling indices for both (the ABX and LCDS/LevX respectively) have been subjected to the most testing market conditions in memory very early on in their development.
LevX, Europe’s leveraged loan index, already faced significant challenges when it was launched in November 2006 and the turmoil in this market in recent months has only served to highlight certain shortcomings.
The news of the launch of LevX Version 2 on March 17 was therefore welcomed by the market, as it addresses the longstanding problem of cancellability of contracts. The restructured index will continue to reference the debt obligation rather than the borrowing entity and will include the top 75 names in the senior index (minimum loan size €500 million) and the top 45 names in the subordinated index (loan size €100 million). And the index contracts will be non-cancellable.
"The key difference between LevX Series 1 and Series 2 is that contracts are non-cancellable, or less cancellable," explains Tobias Sproehnle, director of indices at Markit. "The intention is that in a refinancing the contract will reference the facility that replaces the reference obligation. But if there are circumstances where there is no suitable successor then it will cancel." For single-name trades the contract retains the option for cancellation at the time of the refinancing.
Series 2
The hope is that the new version of the index will encourage greater volumes of trading in the index. "We only see Bloomberg runs from about three houses," observed Alex Preston, director at the Carlyle Group at a recent industry gathering. "It used to be 10 when the product was at its peak. I hope that others will get involved now that LevX is in Series 2. Europe is a very difficult market without an index as active as LCDX." Thirteen market makers are signed up to LevX.
Carlyle Group has been a pioneer in the European synthetic CLO space in a series of deals arranged by Goldman Sachs. "Synthetic CLOs are not the answer but they are an answer to re-engaging with investors," says Preston. "The flexibility of the synthetic product has worked very well. You can lock in the market level instantaneously and you can issue discrete tranches and delta hedge the rest. It is far less cumbersome than cash." However, the private nature of the loan market means that information flow is far from perfect, and Preston reveals that the LCDS in its synthetic deals reference loans that Carlyle already holds in cash CDOs and for which it has, therefore, already done the credit work.