This is the most common application for cash-style corporate bond investors. For example, a fund manager can achieve yield enhancement through structuring synthetic corporate bonds with credit default swaps. Specifically, credit default swaps can be combined with high quality asset-backed securities to create a cheap corporate bond with negligible additional risks
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Credit derivatives offer a wide range of capital market applications. Participants include banks, insurance companies, total return investors, mutual funds and hedge funds. Additionally, corporations have recently begun to use credit derivatives to hedge capital market activities and business risks. Market participants are motivated to use credit derivatives for 1) relative value; 2) market access; 3) hedging and risk management; and 4) management of indirect or noneconomic costs.
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Credit derivatives on high yield credits are also becoming more popular as convertible bond investors hedge embedded credit risk to isolate equity risk.
To date, the primary users of credit derivatives have been commercial banks, using default swaps to take their loans off-balance sheet. Recently, the investor base has broadened to include: money managers, mutual funds, and insurance companies. The primary area of growth has been the new "sellers" of credit protection such as reinsurance companies, life insurance companies and CP conduits who have come on-line for default swaps in the past six months.
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