Presentation to ISDA seminar‘Credit Derivatives referenced to Leveraged Loans– Key Issues and Aspects’

Brand RicheyPortfolio ManagerLondon – July 11th, 2006

Hedging before introduction of LL CDSPossible but cumbersomeOutright sale of asset

Potential damage to relationship

(Sub)-Participation Admin-intensive

Hedge with bond CDS Often not available Different maturity, terms

Advantages of LL CDSLL 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!)

Issues and points for discussionBreakthrough: 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