The publication of International Swaps & Derivatives Association standard documentation for European loan-only credit default swaps (LCDS) is expected to define the shape of the LCDS market on specific syndicated secured loans. In addition, it should lead to a significant increase in trading on the market as lenders look to synthetic protection as an alternative to physical methods of transferring loans and as new types of investor seek to take synthetic investments in these loans.
Traditionally, a lender seeking to remove all or part of the credit risk on a particular loan from its balance sheet – or to otherwise share the risk inherent in advancing money to a borrower – would look to do so in the physical secondary loan market, by either selling the loan or granting a sub-participation. Should the lender sell the loan outright via an assignment or, more commonly, a novation, usually using a novation mechanic contained in the syndicated loan agreement, it will make a clean transfer of the loan (or that part of the loan being sold) and all risks and rights in the loan (including voting rights) will pass to the buyer.
