Credit event payment or settlement is the amount that is paid following a credit event. This is defined in the contract, and is normally one of three types:
(a) Physical delivery: payment of par or other specified value in exchange for physical delivery of the Reference Asset (or a variety of assets) of the Reference Entity as allowed under some contracts.
(b) Cash settlement: payment of par less recovery value. The Reference Asset will normally retain some value after a credit event has triggered settlement of the contract. The recovery value is normally determined at a date up to three months after the credit event, by a dealer poll or auction.
(c) Fixed Amount: Payment of a fixed amount.
Credit Spread are the difference in ‘yields’ between an agreed reference rate and the specific asset in question. The credit spread is based on market perceptions of the credit quality of the underlying asset compared to a market benchmark. Thus, in the London market, the spread would usually be measured against LIBOR or a specified UK gilt, while in the US market they would normally use US treasury.
Reference Asset refers to the asset to which payments under the credit derivative contract are referenced or linked. It is also called reference obligation.
Underlying Asset refers to the asset on which credit risk protection is bought by the Protection Buyer. It could be a bank loan, corporate bond / debenture, trade receivable, emerging market debt, municipal debt, etc. It could also be a portfolio of credit products. This is usually also the Reference Asset.
Reference Entity is the entity upon whose credit the contract is based.
Deliverable Obligation defines what assets are eligible for delivery as settlement in a physical delivery contract. It usually includes Reference Obligation but will often be broader to include other obligations.
Obligations defines what assets may trigger a Credit Event. These are usually same as the underlying asset.
Sponsor denotes the entity that places the portfolio in a Special Purpose Vehicle for issue of notes.
Senior Debt means that portion of funding in case of structuring of a Collateralized Debt Issue (CDO), which has the lowest risk weight, or the highest rated debt.
Mezzanine Debt refers to that portion of funding in case of structuring of a Collateralized Debt Issue (CDO), which has debt in ascending order of risk weights, or in descending order of ratings.
Equity refers to the balance funding in case of structuring of a Collateralized Debt Issue (CDO), which has the highest risk weight, or the lowest rated debt.