Houses including Dresdner Kleinwort Wasserstein, Merrill Lynch, Goldman Sachs and Deutsche Bank have started trading leveraged loan credit-default swaps, market officials reported. Morgan Stanley has traded USD1 billion in notional since August, said Richard Stuart-Reckling, v.p. and credit product manager at the firm in London.
Dealers said the invitation last month from the International Swaps and Derivatives Association to set up a documentation group dedicated to the instruments also underscores the potential for the market taking off.
Synthetic collateralized debt obligations--which reference cash loans, but are secured through a CDS with a special purpose vehicle--have already taken flight. Deutsche Bank is marketing a EUR1 billion transaction to Asian and European investors which will be administered by firm's principal finance arm Winchester Capital. Called Moorgate, it references BBB- to AAA-rated U.S. and European senior secured loans, said Alex Graham, managing director at WinCap in London. Structuring officials at Deutsche Bank declined comment. The next step for the firm and the market will be pure synthetic CDOs which reference portfolios of CDS on leveraged loans, noted an official close to the transaction.
A secondary market for single-name leveraged loan CDS is also tipped to develop, spurred on by the ISDA working group plans. The trade group has invited market participants on both sides of the Atlantic to sit on the group which is charged with developing market-wide documentation for synthetic loans. "It will contemplate the merits of a full-blown loan confirmation versus additional provisions to CDS documentation," said Jamila Roos, assistant general counsel at ISDA in New York.
Issues surrounding the differences between CDS on unsecured corporate bonds and senior secured leveraged loans require lengthy debate, said one structurer who plans to join the group. These include settlement mechanisms, the inclusion of restructuring as a credit event and the actions upon a loan being repaid before the swap maturity, he added.
