The Loan Credit Default Swap Index (Markit LCDX) is a sophisticated benchmark encompassing loan-only credit default swaps (CDS) for 100 North American companies with unsecured debt active in broad secondary markets. The LCDX operates in an over-the-counter environment and is managed by leading investment banks, providing crucial liquidity and price assistance for individual CDS. IHS Markit Ltd, London, is the notable provider of this index.
Key Insights
- The Loan Credit Default Swap Index (Markit LCDX) is a targeted index featuring loan-only credit default swaps for 100 distinct North American firms with unsecured debt in the broad secondary markets.
- LCDX is traded over-the-counter and secured by a collective of major investment banks that ensure liquidity and help in pricing individual CDS.
- IHS Markit Ltd., based in London, supplies the index.
- The LCDX starts with a fixed coupon rate (225 basis points), where trading influences the price and alters the yield, similar to standard bonds.
- Minimum purchase thresholds for the LCDX can span into the millions, often limiting investors to large institutional entities like asset managers, banks, hedge funds, and insurance companies.
From Coupon Rates to Yield Dynamics
The index initiates with a fixed coupon rate of 225 basis points, with trading activity leading prices and adjusting yields much like conventional bonds. The index is updated biannually. Investors in the LCDX pay the coupon rate in exchange for protection against credit events, while sellers receive the coupon and extend protection.
Protection stems from concentrations on potential credit events (e.g., a company defaulting on a loan or going bankrupt) of listed companies within the index. Should such events occur, compensation is realized either by the physical delivery of the debt or through a monetary settlement between the counterparties. The affected company is then replaced in the index to maintain 100 constituents.
Pricing Risk and Ensuring Protection
Credit default swaps append specific prices to risks associated with potential default from a debt issuer. Companies with stellar credit ratings have lower risk premiums budgeting for minimal protection fees, computed as a percentage of the accompanying [notional (dollar) value](e.g., $ value) of the underlying debt. Conversely, lower-rated companies command higher premiums to secure against their credit risk, increasing the CDS cost by several percentage points of the notional value.
Minimum trading volumes for the LCDX can attain stratospheric levels in the millions of dollars, making it predominantly accessible to colossal institutional firms resembling asset managers, hedge funds, banks, and insurers. Partakers stand to profit from diversified exposure to an array of companies sans individual purchase costs, crowning the LCDX as an economical and speculative solution for high-net-worth investors.
Related Terms: Credit Default Swaps, Institutional Investment, Fixed Coupon Rate, Credit Ratings, Secondary Markets.
