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Brand Richey Portfolio Manager

Presentation to ISDA seminar ‘Credit Derivatives referenced to Leveraged Loans– Key Issues and Aspects’. Brand Richey Portfolio Manager. London – July 11th, 2006. Hedging before introduction of LL CDS. Possible but cumbersome Outright sale of asset Potential damage to relationship

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Brand Richey Portfolio Manager

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  1. Presentation to ISDA seminar‘Credit Derivatives referenced to Leveraged Loans– Key Issues and Aspects’ Brand Richey Portfolio Manager London – July 11th, 2006

  2. Hedging before introduction of LL CDS Possible but cumbersome • Outright sale of asset • Potential damage to relationship • (Sub)-Participation • Admin-intensive • Hedge with bond CDS • Often not available • Different maturity, terms

  3. Advantages of LL CDS LL CDS fills gap in the market • No disclosure to client • Exactly matches underlying asset (cancellable) • Active portfolio management (long/short) • Trade entire capital structure • Reduce capital consumption (Basel II) • Liquid, standardised market (tbc!)

  4. Issues and points for discussion Breakthrough: Introduction of standard docs, but • Infant European LL CDS market • Not stress-tested, no default yet • LL CDS can be difficult to value • Factors: call risk, default risk, recovery • Potential for mark-to-market losses • Stable loans, volatile CDS

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