Credit default swaps for European leveraged loans

Abstract

The credit derivatives market has experienced explosive growth in recent years. As such, and in connection with the success of credit default swaps on unsecured bonds, the market demanded a credit derivative product based on leveraged loans. In June 2006, the International Swaps and Derivatives Associations, Inc. (ISDA) published a set of standard terms for credit default swaps on “syndicated secured loans” in the United States, which were amended in May 2007 (“US LCDS”).Due to variations in the European leveraged loan structures, and the differing needs of the European market participants (including portfolio managers), the European loan credit default swap has evolved separately from US LCDS. That evolution continues today. In Europe, a number of dealers agreed on a “cancellable” form of standard terms for credit derivative transactions on leveraged loans in October 2006 (“cancellable ELCDS”). In June 2007 (and amended in March 2008), ISDA published the standard terms of credit default swaps on leveraged loans for the European market (“ISDA ELCDS”).