A credit default swap (CDS) in which the underlying is a syndicated secured loan rather than corporate or sovereign bonds, unsecured loans, asset-backed securities, and so on. In other words, it is a contract pursuant to which the protection seller undertakes towards the protection buyer to assume the default or non-performance risks (usually any stipulated “credit event” like failure to pay, bankruptcy, credit downgrade, etc) of a particular reference entity with regard to an underlying asset (reference obligations). In return for the protection received, the protection buyer undertakes to pay the protection seller a fixed premium at specified intervals up to the termination date of the swap.

Contrary to traditional CDS transactions, the leveraged credit default swap (LCDS) restricts deliverable obligations to certain levels, allowing the protection buyer a more efficient hedging tool and insulating sellers from exposure to leveraged loans.