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Loans index to launch in US

Duncan Kerr 24 May 2007

An index on which derivatives of leveraged loans can be traded is to be launched in the US on Tuesday.

Markit Group, a credit derivative pricing company, said last week the LCDX index of loan credit default swaps would begin on May 22.

The launch of this US version of the European LevX loan default swap index, which was introduced last October, is expected to be a catalyst to a market recording growth in line with the boom in private equity-led leveraged lending.

The value of global leveraged loans made to junk or sub-investment grade rated companies rose to $450bn (€332bn) at the end of March compared with $248bn at the end of 2005, according to rating agency Standard & Poor’s.

The global volume of default swaps on leveraged loans is about $52bn compared with $6.3bn at the end of 2005, said the Loan Syndications and Trading Association.

Loan credit default swaps offer buyers insurance against non-payment of high-yield secured loans. The derivative contract allows investors to trade exposure to loans by selling protection through the index.

However, although the market has been developing, it is dwarfed by the $34 trillion credit default swap market.

Growth has been hindered because of a dispute between top-tier banks over the structure of European and US contracts. US loan credit default swap investors, who use the products mainly for speculation, prefer a contract that continues after a loan is repaid by transferring to a new loan issued by the borrower.

Source:
http://www.financialnews-us.com/?page=ushome&contentid=2447874883

 
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