What is Loan Credit Default Swap – LCDS?
A type of credit derivative in which the credit exposure of an underlying loan is swapped between two parties. A loan credit default swap’s structure is the same as a regular credit default swap, except that the underlying reference entity is limited strictly to syndicated secured loans, rather than any loan or bond.
Also know as a “”loan-only credit default swap””. Read more for examples and further explanation including related video clips and also comments
Example explains Loan Credit Default Swap – LCDS
As with regular CDS, these derivatives can be used to hedge against credit exposure the buyer may have or to obtain credit exposure for the seller. These products can also be used to make bets on the credit quality of an underlying entity to which parties have not had previous exposure. It is important to understand why LCDS are broken out separately from CDS. The fact that the reference loans are secured leads to higher recovery values if those loans default. As a result, LCDS generally trade at tighter spreads.
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