Lend Money, Earn Interest? Not Easy in Europe's Loan Market

  • Industry group drawing up rules to speed primary settlement
  • ’Know your client’ burden blamed for agent inefficencies

For investors still waiting for the first interest payment on the leveraged loan they joined, there may be a glimmer of hope.

The Loan Market Association, an industry body, is preparing to publish guidelines aimed at speeding up the settlement process and making the European leveraged loan market more efficient.

“We are in the final stages of drawing up new guidelines to address primary settlement issues," said Nicholas Voisey, managing director at the LMA, in an interview. "The guidelines would include a defined settlement period and delayed compensation element. It is a challenging, complex, but necessary project.”

The proposed rules will tackle an issue that’s long blighted the industry, with investors frequently having to wait weeks for their first payment. While the market has nonetheless flourished -- new-issue volume has picked up again this year -- this growth means the complaints from lenders have only become louder.

“To achieve the full potential of the asset class with institutional investors, primary loan settlement must be predictable, efficient, timely and reliable,” said Charles Bennett managing director, European Credit Sales at Credit Suisse Group AG.

Know Your Client

The LMA’s guidelines aim to diffuse tension between lenders and the agent banks responsible for making interest payments. Lenders blame some agents for slow settlement, citing understaffed back offices and foot-dragging -- while the bank pockets the interest.

Agents have to go through a rigorous "Know Your Client" process with each individual fund. Increased demands for information from regulators make this process more burdensome. Agents that have been stung with fines have had to crank up their KYC process to avoid further penalties, creating more delays.

By providing the necessary information in a timely manner lenders can help improve the settlement process and preserve returns for their investors. Some arrangers have also switched to independent agency providers to speed things up.

European loans are settled by many agencies operating in multiple regions, currencies and languages. This further complicates the European settlement issue, said Voisey.

Even in the U.S. -- which operates under one jurisdiction, language and currency, and with fewer agents -- a similar story is playing out. The LMA’s equivalent there, the Loan Syndications and Trading Association, announced plans for a delayed compensation regime for its primary loan market last August.

The loan market there is also thriving even as it waits for these measures. September has been the busiest week for launches since January, amid a surge in new money financing.

On Risk

Efforts to resolve slow settlement are hampered by a debate over who is "on risk" during the process. Put another way, parties need to agree the point at which the risk of holding the loan transfers to the lender from the arranger.

Agent banks say they are on risk until the KYC process is complete, so they should receive the interest until the lender funds in to the loan. Lenders counter they have to take an entire allocation even if the agency is unable to complete KYC for all of the manager’s funds, putting them on risk during the settlement process.

The issue has been key to the LMA as it develops the guidelines, according to Voisey.

(Sarah Husband and Ruth McGavin are leveraged-finance strategists who write for Bloomberg. The observations they make are their own and are not intended as investment advice.)

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