Loan credit default swap dealers will meet this Thursday at Lehman Brothers' offices to lay the groundwork for a tradeable index comprised of CDS referencing loans. The meeting, which is expected to include traders from Lehman, Credit Suisse, JPMorgan, Morgan Stanley, Deutsche Bank and Goldman Sachs, among others, will focus on the structure of the loan index and how it will be branded. At issue is whether it falls under the same administration as the current CDX product, or if it should be something dealers should put together themselves.
"Documentation is almost done for the single-name LCDS structure," said Doug Grossberg, a loan CDS trader at Credit Suisse. "The next step is to convert that product into an index and sub-indices." About 12 dealers were invited to attend the meeting. Buysiders will not be present, but it is expected their input will be taken into consideration in the future. There is no clear time frame on when this will be ready, but it is expected to officially launch with other CDX products in September, although it may be up and running before then. Credit Suisse has experience after structuring the SAMI product, a loan default swap index put together two-and-a-half years ago that is comprised of 50 CDS referencing par loans, and it is anticipated they will be able to offer assistance in setting up this index.
Separately, a final draft of The International Swaps and Derivatives Association loan credit default swap confirm will be distributed to members today to ask for a final round of feedback. Kimberly Summe, general counsel, anticipates holding a call the week of May 22 to discuss the most recent draft, and the association still hopes to publish the confirm around Memorial Day.
ISDA last held a call April 26 to elicit more feedback. Summe would not discuss specific issues members raised, but she said there were several and many of them dealt with the physical settlement rider, a document being published by the Loan Syndications and Trading Association. A representative of the LSTA could not be reached by press time, but Elliot Ganz, executive v.p. and general counsel, previously said the physical settlement rider is in good shape and should be ready when ISDA's document is ready (CIN, 4/28).
Morgan Stanley began actively trading last week and JPMorgan began actively trading about two weeks ago, joining those banks that are already active, including Lehman Brothers, Credit Suisse, Deutsche Bank and Goldman Sachs. Rob Milam, head of par loan and loan-only credit default swap trading at JPMorgan, said the bank has done about a dozen trades in LCDS.
The most common names trading are the larger, benchmark loan issues, such as Cablevision, Eastman Kodak, El Paso, NRG Energy, Reliant, and Smurfit-Stone, he said. Apart from banks making markets in LCDS, Milam said by email that the most active participants in the market so far are hedge funds, particularly as sellers of protection, but also as buyers in certain cases. The other group that has been active is credit portfolios, which have used the product both to hedge their loan positions and to generate extra income.
