what is a loan credit default swap lcds 
a loan credit default swap lcds is a type of credit derivative in which the credit exposure of an underlying loan is exchanged between two parties a loan credit default swap s structure is the same as a regular credit default swap cds except that the underlying reference obligation is limited strictly to syndicated secured loans rather than any type of corporate debt loan credit default swaps can also be referred to as loan only credit default swaps understanding a loan credit default swap lcds the lcds was introduced to the financial market in 2006 at the time the hot market for credit default swaps showed that there was still an appetite for more credit derivatives and the lcds was largely seen as a cds with the reference obligation shifting to syndicated debt instead of corporate debt the international swaps and derivatives association isda helped to standardize the contracts being used at the same time as the creation of syndicated secured loans for the purpose of leveraged buyouts was also increasing the lcds comes in two types a cancelable lcds is often referred to as a u s lcds and is generally designed to be a trading product as the name suggests the cancelable lcds can be canceled at an agreed upon date or dates in the future without penalty costs a non cancelable lcds or european lcds is a hedging product that incorporates prepayment risk into its makeup the non cancelable lcds remains in force until the underlying syndicated loans are repaid in full or a credit event triggers it as a u s lcds has the option to cancel these swaps are sold at a higher rate than comparable non cancelable swaps the recovery rate for lcds is much higher than for cds on bonds because the underlying assets for lcds are syndicated secured loans 1loan credit default swaps vs credit default swapsas with regular credit default swaps these derivative contracts can be used to hedge against credit exposure the buyer may have or to obtain credit exposure for the seller a lcds can also be used to make bets on the credit quality of an underlying entity to which parties have not had previous exposure the biggest difference between a lcds and a cds is the recovery rate the debt underlying an lcds is secured to assets and has priority in any liquidation proceedings whereas the debt underlying a cds while senior to shares is junior to secured loans so the higher quality reference obligation for a lcds leads to higher recovery values if that loan defaults as a result a lcds generally trades at tighter spreads than an ordinary cds 