DEFINITION of 'iTraxx LevX Indexes'
A set of two tradable indexes that hold credit default swaps (CDSs) representing a diversified basket of 35 European companies that have liquid debt offerings in the secondary market. The iTraxx LevX Senior Index represents only senior loans, while the iTraxx LevX Subordinated Index represents second- and third-lien loans.
The index offers two pricing sets each day: a mid-day price and end-of-day price. Prices are maintained by a consortium of investment banks, including Morgan Stanley, Barclays Capital, and Lehman Brothers. Both indexes begin with an initial coupon rate, then trade up or down to reflect market activity. New LevX indexes are released periodically to reflect new debt offerings or new company participation in the leveraged loan markets.
BREAKING DOWN 'iTraxx LevX Indexes'
The iTraxx LevX indexes have only been trading since late 2006, and while trade volume is still low, the average dollar amount traded is greater than $5 million. The contracts are mainly used by speculators and large commercial banks as a hedge on balance sheet assets or other portfolios. Demand for indexes like the iTraxx group increased greatly with the spike in leveraged buyouts in the 2004-2007 period, as LBOs typically create a large amount of low-rated corporate debt.
If the market perceives that overall credit quality is falling, the price of the iTraxx indexes will fall, and therefore pay a higher coupon rate. Because most of the debt covered is leverage loans (lower credit ratings), the index may prove to be more volatile than a hypothetical index that covers investment-grade debt offerings.