Credit Derivative Product Companies: A Robust Business Model

Abstract

Much has been written about the implosion of the structured credit markets and the impact on a variety of different types of structured credit vehicles, many of which have collapsed. However, little attention has been paid to one type of vehicle that has successfully weathered the storm; that vehicle is a credit derivative product company (“CDPC”), which now occupies a small but growing position in the $62 billion credit derivatives market. A CDPC is a triple-A rated entity that is a net seller of credit protection in the form of credit default swaps (“CDS”). This article provides some background on CDPCs that focus on corporate credit risk; explains how they are structured and who invests in them; contrasts their attributes with those of other structured finance vehicles, including monoline insurance companies; and explains the needs in the credit derivatives market that CDPCs satisfy, including the major credit default swap dealers’ need for credit backstops and banks’ need for a vehicle to absorb the mark-to-market risk that arises from CDS being derivatives.