Fund managers who trade risky corporate loans that can take weeks to settle are being told by the biggest underwriter of the debt that they can sell their holdings quickly if they’re willing to pay for it.
Bank of America Corp. has been giving money managers the option to pay a premium to ensure that leveraged loan trades will close within three days, according to four people with knowledge of the matter. The service is aimed at funds that need to raise cash to meet redemptions. Zia Ahmed, a spokesman for the Charlotte, North Carolina-based bank, declined to comment.
Unlike other fixed-income assets, the market for speculative-grade loans continues to embrace antiquated trading practices. Delays in closing trades can exacerbate losses, prompting regulators to warn that investors may not fully understand the risks of investing in funds that hold hard-to-sell assets.
“In the 21st century, in an $800 billion market, the fact that we still don’t have universal identifiers and push a lot of paper around rather than using technology is the issue,” said Frank Ossino, a money manager at Newfleet Asset Management, which oversees $12 billion in assets. “While liquidity in the fixed-income market is what everyone is talking about, settlement is a bigger issue in the loan market.”
Three money managers briefed on Bank of America’s expedited-trade offer said the bank is offering to charge at least 0.125 cent on the dollar. They asked not to be identified because the trades are private. The bank started offering the service several months ago amid an exodus of cash from the loan market.
“They have a vested interested in creating confidence around a product, and this solution seems to fix one problem,” said Peter Lupoff, the founder of hedge fund Tiburon Capital Management, which invests in debt and equities. “But the complexity of unwinding loans is still very much underestimated.”
Loan funds have reported the biggest outflows this year among fixed-income asset classes tracked by Bank of America. Investors pulled $6.9 billion from funds that purchase the floating-rate debt, or 4.9 percent of total assets, according to a June 11 report from the bank.
The average price on the 100 largest loans is on track to post the biggest decline in June since the start of the year, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. The gauge slid to 95.45 cents on the dollar Wednesday, the lowest level since February.
It took an average 19.6 days to clear a loan trade in the first three months of the year, according to Markit Ltd. While that’s down from the three-year quarterly high of 25 days in 2013, it remains more than twice as long as what the industry’s biggest trade group recommends.