Tackling settlement delays in the LMA secondary loan market

Tackling settlement delays in the LMA secondary loan market

Delays to settlement in the Loan Market Association’s (LMA) secondary loan market remains a significant issue. Jacqui Allen, partner at Mandel, Katz & Brosnan, considers some of the most frequent causes of delay, and outlines the steps that are being taken to help reduce settlement times.

How big an issue are settlement delays in the LMA’s secondary loan market at present?

The issue is significant and warrants the attention it is being given by the LMA. Delays in settlement prolong exposure to counterparty credit/market risk regarding price and the delays limit the attractiveness of loans as an asset class when loan settlement times are compared with other types of financial asset.

What are the factors which are currently causing delays to settlement in the secondary loan market?

Causes of delay include:

  • lack of pre-trade due diligence on the asset (eg not having signed a non-disclosure agreement to obtain the documentation so it must be negotiated post-trade date, looking at how the trade fits into minimum transfer amounts/minimum holds frequently found in the transfer provisions of credit documents, multiple borrowers/tranches, whether there are stapled shares or rights of pre-emption/first refusal)
  • know your customer (KYC) on the counterparty
  • regulatory issues in the jurisdictions in which the borrower may be located (eg do you have to be a bank to hold the asset, or what is a ‘financial institution’ in the relevant borrower jurisdiction?)
  • issues relating to investigating the security package and whether there are formalities in relation to perfecting its transfer
  • obtaining borrower and issuing bank consents if so required by transfer provisions in the credit documents and negotiating participation agreements or alternative forms of settlement where transfers are not possible
  • tax analysis of how to buy the loan asset most efficiently
  • restructuring events/lock-ups/settlement freeze
  • brokers waiting on an upstream delivery which may, in turn, be held up by a prior trade, so magnifying issues through the system, and
  • negotiation of non-standard representations/warranties by legal advisers where relevant—after all, loans are bespoke and there may be specific asset-by-asset points for which a seller/buyer should b

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About the author:

Meet Kate:

1. Banking & finance lawyer with experience in syndicated lending and project finance in London, Paris and Sydney

2. Likes yoga, DIY (although the output doesn’t generally reflect the input) and sunny climes

3. Thinks the law is very unlike how LA Law made it look

Kate is a solicitor specialising in banking and finance with particular emphasis on syndicated lending and project finance. She has acted for both borrowers and lenders on a wide range of finance transactions, often involving multiple jurisdictions.

Kate trained and qualified in the Debt and Derivative Securities team at Allen & Overy LLP. She later joined the Banking and Finance team at Freehills (now Herbert Smith Freehills) in Sydney. Most recently, she was in the Projects and Infrastructure team at Norton Rose LLP before joining LexisNexis. Kate is dual-qualified in England and Wales and New South Wales, Australia.