Leveraged Floater Quiz positive, versus, about, credit

Viceroy

An issuer of a leveraged floater ends up with a positive net cash flow each month.

What does this say about the credit risk of a the "leveraged floater" issuer versus the credit risk of the long coupon bond component of the transaction.

mar350

Do you understand "leveraged floater" as having issued a coupon bond and a receive fixed interest rate swap or did I miss something in the books?

The long coupon bond side (the counterparty to the issuer) has current and potential credit risk (on a stable basis)

the (leveraged floater) issuer has current and potential credit risk. current credit risk because he currently receives net payments from his receiver swap and potential credit risk, as this could continue (no exchange of notional with IRS). If IR rise, he is only left with potential credit risk.

As one note has the exchange of principal and the other not, and the above is usually with different counterparties, I would not assume you can make up a "net position" of credit risk as this would compare apples and oranges.

liangfeng

A leveraged floater issuer has:

A long position in a normal floating coupon bond (receiving 2f x Notional)
+
A short position in a leveraged floater paying lets say 2L x Notional
+
A swap receiving L x 2 x Notional and paying swap rate x 2 x Notional

Net cash flow = 2 x Notional x (f - swap rate)

Now, becasue the 3 positions are with 3 different counterparties, it is inappropriate to net the credit risk.
A. The issuer faces credit risk from the normal bond issuer.
B. The counterparty of the leveraged floater faces credit risk from its issuer
C. Credit risk in the swap would vary in size and direction depending on the LIBOR term structure through the life of the swap

NakedPuts00

On second thoughts, just by looking at my final equation for Net cash flow one can tell that a +ve net cash flow means that the normal floating bond issuer is paying a spread over the prevailing swap rate and hence is a possible source of credit risk