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US Loan CDS index begins at last as further progress is made with standard tranches
The long-awaited launch of LCDX (SCI passim) met with enthusiastic trading on its first day, 22 May. Dealers report significant two-way volume and quoting up to US$250m markets with bid-offers as tight as a sixteenth.
The previous day dealers held a conference call to discuss proposed standard tranches for the LCDX, which will initially, at least, be set at 0-5%, 5-8%, 8-12%, 12-15% and 15-100%. Further conference calls are expected over the coming weeks and no timeframe has yet been set for the start of tranche trading, but dealers say that significant progress was made this week.
One says: "We moved further along on how the standard contracts should work to the point that we have now only got one trading issue that needs to be dealt with. The predominance of the work now has to move over to the legal side and getting the documentation done, which will, of course, take some time."
That trading issue is to be determined by investors. "We want to see what clients prefer to do, so we and the other firms will be asking them whether they want everything to trade on a spread basis or on a dollar basis, or on some combination thereof. It will be interesting see what the response will be, but my guess is that it is most likely to be a preference for trading on a spread basis for all the tranches except the equity tranche, which would trade on an all upfront basis. So it would be like high yield," the dealer says.
LCDX comprises a basket of 100 credit default swaps referencing first-lien loans. Deliverable obligations will consist of first-lien loans as defined by Markit RED Loans in accordance with its Syndicated Secured List for North America. RED Loans confirms reference entities and the key identifying information for credit agreements, loan facilities and loan tranches.
As with the CDX and iTraxx credit derivative indices, the LCDX index will roll every six months. It will trade with a five-year coupon, and additional maturities will be added in due course. Only failure to pay and bankruptcy will be treated as credit events.
To coincide with the launch of LCDX, both the Loan Syndications and Trading Association and the International Swaps and Derivatives Association have issued new documentation.
LSTA published a physical settlement rider that is intended to be used in conjunction with the Syndicated Secured Loan Credit Default Swap Standard Terms Supplement as published by ISDA and the LCDX untranched transactions standard terms supplement as published by ISDA and CDS IndexCo, together with the LCDS standard terms. LSTA says in the event of any inconsistency between the LCDS Rider and the applicable Swap Standard Terms, the LCDS Rider shall govern.
For its part ISDA launched trading documentation and auction rules relating to LCDX. The association also published revised documentation for the North American (Single-Name) Loan Credit Default Swap (LCDS), which was originally published on June 8 2006 to facilitate LCDS transactions.
The documentation was modified to conform to the LCDX documentation in terms of the settlement standard. ISDA is also preparing an LCDS Protocol regarding legacy LCDS trades to conform to the new standard set forth in the revised LCDS documentation.