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ARTICLE · 14 NOVEMBER 2008

Loan Pricing Based On Credit Default Swaps - Whither The Rating Agency?

Blake, Cassels & Graydon LLP
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A new trend is developing in the pricing of corporate loans which has the potential to have a major impact on the cost of credit for borrowers and the way in which that cost of credit is calculated.

CanadaFinance and Banking
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
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Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Financial Services, November 2008

A new trend is developing in the pricing of corporate loans which has the potential to have a major impact on the cost of credit for borrowers and the way in which that cost of credit is calculated. There have been several recent occurrences of loans being priced on a margin that is linked to the cost to purchase protection under a credit default swap (CDS) for the related borrower and, in one reported case, to the cost of protection of the lender as the reference entity under a CDS. Based on published reports and SEC filings, variations of these new arrangements have been agreed to by several large corporations, such as FirstEnergy Corp., and NiSource Inc. and by household names such as Nestlé and Nokia.

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