Loan market war of words erupts over settlement delays; dirty little secret behind fund losses
(2009-04-28) Vulnerabilities in Debt Relief Industry
(2009-02-27) ISO Certification for Debt Settlement
(2008-12-22) Warns of disturbing UK debt
(2008-11-11) Loan market war of words
(2008-11-09) A matter of life and rising debt
(2008-11-05) Debt to Settle Credit Derivative Trades
Deteriorating loan prices and extensive trade settlement delays have set off a market firefight as both sides of the Street trade accusations and invective. The gridlock has infuriated buyers of loans who bid on debt in recent months only to watch the market value of their investments tumble precipitously before their trades even settled.
Hold-ups are most prevalent in the distressed loan market, where the volume of trades doubled in 2Q to approximately 3,500, according to data provided by the Loan Syndications and Trading Association (LSTA). In 2Q, the mean settlement was T+40 versus the T+30 median and 33% of trades occurred within T+19 against a target of T+7.
Settlement times have ballooned since then, but even the 2Q average and median far exceed what most trading desks deem acceptable. “[For] distressed stuff, we are at about T+20,” said one buyside trader”. “If not, there better be a darn good reason.”
Current trading documentation allows would-be loan buyers to serve sellers with a buy-in notice, but only within a window spanning T+7 to T+13, said an LSTA source. The notice stipulates that the seller has failed delivery and if necessary must cover the cost of purchasing the loan elsewhere, potentially at a higher cost.
But given that trades aren’t considered past-due until T+14 under historic norms, investors face strong pressure not to pull the trigger. “The buyside has the option of submitting a buy-in notice but we were told by one dealer … that if we did that, they would never do business with us again,” said the first PM.
The LSTA claims that new documentation will be published by year end to establish a buy-in and sell out procedure to make a “definitive impact on manipulative short selling,” said the source within the organization. The new docs would allow a buyer to serve a buy-in notice any time after a counterparty fails to deliver within T+30, the source added.
The protocol change may discourage some short selling but it won’t address the logistical underpinnings of the settlement logjam, said a second senior PM.
In a typical loan transaction, a buyer calls a sellside dealer with a request for paper, the dealer writes a trade ticket and sends a written confirmation for the buyer to fill out and return. The trade is then booked but the dealer must wait for the borrower to approve purchase and sign a sale agreement. Lastly the confirmations are sent to the loan agent who needs to process the trade.
The final stage can be the most problematic because agent banks prioritize trades executed by their own desks ahead of those submitted by competitors, said two sources on Wall Street trading desks. Trades for loans issued by Tribune, for example, lingered with JP Morgan, the agent bank, longer than they should have, said one of the trading sources.
Tribune’s USD 7.57bn term loan B has cratered recently to 44/688-46.438 after being quoted as high as 68.775-69.625 in early September, according to Markit. Its term loan X, with USD 593m outstanding due next spring, had fallen to 78.25-82.375 from 95.8-96.75 over the same timeframe.
Not everyone attributed agent backlog on favoritism. “Settlement is a huge issue but I don’t think it’s necessarily malicious,” said the buyside trader. “You have agent banks that have enormous internal problems and they are understaffed and guys are overwhelmed.”
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Vulnerabilities in Debt Relief Industry
ISO Certification for Debt Settlement
A matter of life and rising debt
Debt to Settle Credit Derivative Trades
Debt Settlement Companies Ignored by Banks