Portfolio Credit Derivatives

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Portfolio Credit Derivatives are used to offset or take on credit exposure to a group of credits utilizing mechanics similar to default swaps. One example of a portfolio credit derivative is a synthetic collateralized loan obligation (CLO) that combines securitization and credit derivative technologies. This type of structure retains loan assets on the sponsoring bank's balance sheet, but transfers the credit risk exposure to a Special Purpose Vehicle (SPV) or other counterparties via credit derivatives.

In all synthetic CLO structures, Lehman Brothers works with the sponsoring bank to select the appropriate reference portfolio. The reference portfolio may either be fixed and amortizing or could revolve over a specific period.

Based upon such a reference portfolio, the sponsoring bank enters into senior and subordinated credit default swaps while retaining a small first loss exposure. Lehman Brothers assists in the placement of the senior swap with one or more bank swap counterparties; the subordinated swap typically is structured into a securitization trust that acquires 0% risk weighted investments through the issuance of rated securities.

The sponsoring bank holds dollar-for-dollar regulatory capital against the first loss piece and would receive a percentage reduction in capital against a notional amount of the senior swap.

  
Structure Diagram:

Diagram for Portfolio Credit Derivatives



This material is being provided for informational purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any product. Structured products are not appropriate for all investors. Clients are advised to make an independent review and reach their own conclusions regarding the economic risks and benefits of any structured transaction and the legal, credit, tax, accounting and other aspects of such transaction in relation to their particular circumstances. The examples provided are based on certain assumptions that may or may not reflect all potential variables that could effect the value of a structured product. This information has been obtained from various sources. Lehman Brothers does not warrant the accuracy, completeness, timeliness, reliability, fitness for a particular purpose or merchantability of this information.