Nth-to-default basket

A credit derivative in which the payout is linked to one in a series of defaults (such as first-, second- or third-to-default), with the contract terminating at that point.

Nth-to-default baskets have similar characteristics to synthetic CDO tranches, in terms of leverage and exposure to correlation. However, their mechanics are different: in an nth-to-default contract, the trade settles on the defaulted reference entity for the full notional of the contract following the specified credit event. Also, nth-to-default baskets typically include many fewer names than a synthetic CDO portfolio - usually between five and seven credits.