Syndicated Loans, Loan-only Credit Default Swaps and CDS Legal Documentation

Loan-Only Credit Default Swaps (LCDSs) are a new type of over-the-counter credit derivative that has emerged fairly recently. LCDSs share the purpose of Credit Default Swaps (CDSs) in that they allow trading the credit risk associated with some debt obligation. They have closed a gap that had existed before: Traditional CDSs are not intended to reference leveraged loans, an asset class that has become the primary funding source for sub-investment grade companies. In this text, we provide a detailed discussion of the characteristics of single-name U.S. and European LCDSs and compare them to those of CDSs. To prepare the ground for this discussion, we first have a close look at the differences between leveraged loans and high-yield bonds as both are typical underlyings in LCDSs and CDSs, respectively