The iTraxx LevX Indexes

What Are the iTraxx LevX Indexes?

The iTraxx LevX are a pair of two tradable indexes that hold credit default swaps (CDSs) representing a diversified basket of the 40 (formerly 35) most liquid European companies that have tradable debt offerings in the secondary market.

The LevX indices track what are known as leveraged loan credit default swaps (LCDS). A leveraged loan is a type of loan that is extended to companies that already have considerable amounts of debt or poor credit history.

Key Takeaways

  • The iTraxx LevX are a pair of tradable LCDS indices that track a basket of CDS issued by European firms.
  • One LevX index contains senior debts while the other only tracks subordinated debts.
  • An LCDS is a leveraged loan credit default swap, which uses a particular loan's default probabilities as its underlying.

Understanding the iTraxx LevX Indexes

The iTraxx is a group of international credit derivative indices that investors can use to gain or hedge exposure to the credit markets underlying the credit derivatives. The credit derivatives market that iTraxx provides allows parties to transfer the risk and return of underlying assets from one party to another without actually transferring the assets. The iTraxx indices cover credit derivatives markets in Europe, Japan, non-Japan Asia and Australia. The iTraxx indices are also commonly referred to as Markit iTraxx indices.

The iTraxx LevX track liquid loan credit default swaps (LCDSs), with each of the two indices trading on a 5-year maturity that are rolled semi-annually in March and September. The iTraxx LevX Senior Index represents only senior loans, while the iTraxx LevX Subordinated Index represents subordinated debt including second- and third-lien loans.

A loan credit default swap 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 has the same as a regular credit default swap, except that the underlying reference obligation is limited strictly to syndicated secured loans, rather than any corporate debt.

Loan credit default swaps are also referred to as "loan-only credit default swaps." The LecX indices, in particular, look at leveraged loans in their portfolios. Lenders consider leveraged loans to carry a higher risk of default, and as a result, a leveraged loan is more costly to the borrower.

How the iTraxx LevX Indices Work

The index pair 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 UBS. 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.

The iTraxx LevX indexes have been available for trading since late 2006, and while trade volume is still relatively low, the average dollar amount traded is growing. The contracts are mainly used by speculators and large commercial banks as a hedge against 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 also fall, and thus 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 LCDS based index that covers investment-grade debt offerings.

The following are licensed market makers for the iTraxx LevX index:

  ABN      Bank of America 
  Barclays Capital      BNP Paribas 
  Calyon      Citigroup 
  Commerzbank      Credit Suisse 
  Deutsche Bank      Goldman Sachs 
  HSBC      JP Morgan 
  Merrill Lynch      Morgan Stanley 
  Royal Bank of Scotland      UBS 
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