In addition to the benefits described above for single bond default swaps, portfolio defaults swaps offer investors relative value and a unique type of leverage. More over, investors cannot economically replicate portfolio default swaps in the cash markets.
■ An Example
The most common application of portfolio default swaps is the purchase of second loss protection on large loan portfolios by commercial banks. Although not necessarily explicitly rated AAA, these second loss tranches are structured to achieve premium investment grade ratings. Commercial bank buyers retain the first loss exposure to reduce the cost of the hedge that is purchased to reduce the regulatory equity supporting the portfolio. In the table below, we detail a number of these structures that have been recently transacted, referred to in the marketplace as "synthetic CLOs".
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