Loan-Only CDS (LCDS)
Sunday, June 24th, 2007| 22-May-2007 | Loan-Only CDS (LCDS) Investor Presentation |
| 28-Mar-2007 | CDS Roundup: Spreads Reverse While Volumes Expand |
| 17-Nov-2006 | CDS Roundup: Volumes Expand Across Most Sectors |
www.fitchratings.com 6
Loan-Only Credit Default Swaps (LCDS) - US
> ISDA released standardized LCDS language for US market in June of last year, now updated
> Reference entity focus (at a particular lien level)
> Credit events include failure to pay (on “borrowed money”) and bankruptcy; restructuring credit
event not an option; succession based on loans only, not bonds and loans as in bond CDS
> Contract is cancelable, but only if no deliverable at required seniority is outstanding, while
vanilla (bond) CDS is generally not cancelable at all
> Use of dealer polls to determine “Relevant Secured List” of deliverable obligations and to settle
disputes, maintained by third party provider (Markit)
> New language hardwires cash settlement through index protocol–type auction process;
counterparties may request physical settlement through assignment or participation, though
settlement expected to be mostly through auction process
> In the case of physical settlement, in order to expedite the process, the “Physical Settlement
Rider” and “Market Standard Indemnity” are used, which obligates the protection seller to accept
delivery of loan documentation that is warranted to be market standard in nature