Bad-Loan Traders Seeking Ways to Simplify Process

By Schmelkin, Alissa | American Banker, November 15, 2002 | Go to article overview

Bad-Loan Traders Seeking Ways to Simplify Process


Schmelkin, Alissa, American Banker


The souring economy and the rising number of problem loans has been a boon for the distressed-loan trading market, so much so that industry participants are looking for ways to make the process of closing these transactions quicker and easier.

According to Loan Pricing Corp., the volume of distressed-loan sales and purchases for the first three quarters of the year rose 26% from the same period last year, to $75.6 billion.

Transactions involving distressed loans, or those that trade at less than 90 cents on the dollar, can take anywhere from three to eight weeks to close, because attorneys need to review the deal even after both parties have agreed on a deal.

Barbara Sherman, the special counsel of the Loan Syndications and Trading Association Inc., said its goal is to have such trades close 20 days after they are executed, or as soon as possible thereafter. The New York-based organization, which develops standards for the syndicated lending market, has made simplifying the process its top priority for next year.

Jay McDermott, the senior managing director for distressed bank-loan trading at Bear, Stearns & Co. in New York, said that the "significant increase in trade volume, and subsequently the number of trades that need to be closed, is straining the systems' capacity."

This year's rise in distressed-loan trading can be attributed to the effect of today's difficult economic environment on the record number of loans made in the late 1990s, Mr. McDermott said.

Payson Swaffield, who co-manages more than $8 billion in several bank loan portfolios at Eaton Vance Management Inc. said that there has been "a dramatic increase in the number of trades, both par and distressed debt, (which has) caused a backup in the closing of the loans."

Pat trades, or trades of loans that are not distressed, are easier to close, Mr. …

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