The Role of Credit Default Swaps in Leveraged Finance Analysis

The Role of Credit Default Swaps in Leveraged Finance Analysis

Introduction

This booklet lays out the workings of credit default swaps (CDS) for corporate debt markets, most specifically for credits in the leveraged loan and bond market, and includes examples of how these influence credit analysis.

Much of the analysis on credit focuses on the relative value of investment opportunities. CDS influence how bonds and loans trade relative to each other. CDS can be used as a hedge to limit downside risk in investment positions and represent an interesting investment alternative on their own. Although nothing prevents a CDS contract from being written on almost any credit instrument, some companies issuing loans and bonds in the leveraged finance market ...