September 2021 | Issue 238

News

European loan investors are growing frustrated at the time it takes to settle primary market transactions, with recent hold-ups leaving CLO portfolio managers particularly disappointed.

It can take a couple of months for a loan investor to earn the coupon on the loans they have been allocated. Another loan manager tells Creditflux of a recent loan refinancing, which underlined how inefficient the market can be.

The PM says this deal did not involve material changes (the sponsor was the same) and as an existing lender it made sense to roll in a cashless manner (to avoid being paid back and then reallocating), but even this was not easy to accommodate.

An issue flagged up by a third portfolio manager is how banks tend to fund loan investors in several rounds. This means some lenders will be funded several weeks ahead of others.

Market-wide implementation of delayed compensation standards would be beneficial for loan investors, but there is little incentive for banks to adopt this.

“You have to pay close attention,” says the first portfolio manager. “You could be 100% invested, but 20% is not earning anything. Every CLO manager should do an analysis on how much delayed comp they could have earned this year and how that could have impacted CLO equity returns.”

Nigel Houghton, managing director at the Loan Market Association, says a lack of resources to deal with the growth of the loan market is slowing settlement times.

“The number of trades has doubled over the last three years, while there are double the number of individual funds investing in loans today versus five years ago,” he says. “But in the last few years there has been a shaving of resources. You can’t expect settlement times to decrease, or even stay level, if you have a 100% increase in trades with 90% of the staff.”

Given the number of trades being executed, netting is a possibility, but it’s not a practice widely used. London-based Houghton says that other solutions, such as improved technology, are of little use if sell side and agency banks are not adequately staffed.

He says that the US loan market is more efficient because it is one currency and one jurisdiction and, therefore, much more commoditised.

Sabrina Fox, CEO at the European Leveraged Finance Association, says lengthy loan settlement times have been raised by its members as a top priority to address in the near term. “We are liaising with other trade bodies and planning outreach to market participants… we are also drafting an insights report to summarise the issue for investors and others in the market. The LSTA has managed to tackle the issue, and we will where possible seek to leverage their experience.”