Banks look to offload ‘orphan’ hedge risk

Bespoke CDSs shift private credit borrowers’ derivatives default exposures back to the buy side

Andrii Yalanskyi/Alamy Stock Photo

Some banks providing hedges to companies borrowing from non-bank lenders have sought to sell the derivatives counterparty exposure to buy-side clients in an attempt to offload the risk and operational burden posed by the transactions.

The bespoke market has grown out of the hedging needs of high-yield corporate borrowers that raise debt from private credit funds. Unable to source hedges from these lenders, companies have turned to banks for so-called orphan hedges, named for the separation

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