July 21, 2022 - The attendees of the LSTA summer series learnt about the secondary loan trading market and loan trade settlement this week from the LSTA’s Ted Basta and Ellen Hefferan. Mr. Basta kicked off the secondary market discussion by noting that the loan market was not immune from the fears of a recession and rising interest rates and consequently was encountering the same type of increased levels of volatility that challenged other asset classes. However, the loan market was holding up and, in fact, leading the other major asset classes with only a negative return of 4.5%. Although institutional loans outstanding have increased through June to $1.4 trillion, growth expectations for the remainder of the year have been tempered. Trade prices have also been impacted and have trended down to two year lows during the second quarter with June levels falling to 94.5. The loan market set a record $459 billion of trading volume during the first half of the year. This high volume of trading can be a concern for a market that struggles to achieve target settlement times and so Ms. Hefferan welcomed the opportunity to teach webinar attendees about how to settles these loan trades and key provisions of the LSTA’s Primary Allocation Confirmation and Par/Near Par Trade Confirmation. She reviewed the forms of purchase, explaining the differences between an assignment and a participation and further noted that it is market practice for a Seller to solicit the vote of its trade counterparty on a pending amendment or waiver, prior to the actual settlement date, although the opposite is expressly provided for in the LSTA’s trade confirms. Delayed compensation and cost of carry were reviewed, highlighting the importance of “Trigger Dates”, “Ready Dates” and Commencement Dates”. All LSTA trades entered into on and after December 2, 2021, now calculate cost of carry based on average daily SOFR plus a credit spread adjustment of .11448%. Pre-Trigger and Post-Trigger allocations and their respective relationships to Pre-Trigger and Post-Trigger Trades were distinguished utilizing flowcharts and purchase price calculations, proving that a buyer that qualifies for delayed compensation on such primary allocations, will not lose money if the facility is subsequently sold in the secondary market to a buyer that also is entitled to delayed compensation. This is not the case with Early Day Trades as compensation is not earned on the previous respective primary allocation. Ms. Hefferan strongly suggested that, for liquidity purposes, parties should follow the LSTA convention that if a Borrower does not respond to a request for consent to a pending assignment, that such consent be deemed within five Business Days. She rounded off the presentation with regular secondary trade pricing calculations that included commitment reductions, non-recurring fee payments, delayed compensation/cost of carry and multiple loan contracts. Click here for the slides and replay.
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