The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Capital Markets

CDS on leveraged loans

Access to collateral is the number one topic of conversation in the CLO market. But if a viable leveraged loan CDS market develops, Christmas will have come early for many players.

How CLO managers muscled in on the LBO market

How to judge manager performance

However, as the ABS CDS market has shown, these products can be tough to get off the ground.

In order to be traded in any size a CDS market needs liquidity and volatility in the underlying. Indeed, the ABS CDS market has only really taken off in the triple-B home equity space, with hedge funds using it as a speculative play to go short US consumer and housing risk. And while leveraged loans may be more volatile than ABS (see chart), are they volatile enough?

“LCDS are an attractive product for both trading and investment books,” says Marcus Schüler, managing director, integrated credit marketing at Deutsche Bank in London, which together with Morgan Stanley and DrKW has been most active in the nascent market. He adds that this is probably the CDS on a new underlying that has created the most intial interest from clients: “The creation of LCDS has brought more than 30 new high spread exposures to the market, something many market participants have been waiting for.”

A leveraged loan CDS market could be created from capital structure arbitrage; playing the relative value of the senior loan versus the high yield bond or mezzanine loan or second lien.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree