TRLPC: Loan market asks SEC to revise liquidity proposals that could hurt funds

Blackrock Capital Investment

22/01/2016 17:47

By Kristen Haunss 
    NEW YORK, Jan 22 (Reuters) - Participants in the US$870bn US 
leveraged loan market have asked the US Securities and Exchange 
Commission (SEC) to revise parts of a liquidity proposal that 
could hurt mutual funds that provide financing to non-investment 
grade companies. 
    Firms including Credit Suisse Asset Management, BlackRock 
and OppenheimerFunds, and trade body The Loan Syndications and 
Trading Association (LSTA) asked the regulator in January to 
reconsider ordering mutual funds and exchange-traded funds 
(ETFs) to rank holdings according to the time it would take to 
sell the asset. 
    The firms said that classifying investments into six 
categories based on the number of days that it would take to 
convert assets into cash, as the SEC proposed, is challenging, 
especially for loans due to long settlement times. 
    "The SEC's proposal to put each instrument into one of six 
liquidity classifications assumes a degree of certainty and 
precision that simply does not exist," Bram Smith, the executive 
director at the LSTA, said in a letter to the regulator on Jan. 
13. 
    The firms' letters were among more than 60 responses 
submitted following the SEC's request for comments on its 
September liquidity proposal. 
    Investors and the LSTA also asked that the SEC keep its 
definition of an illiquid asset, as a proposed change to take 
into account settlement times could negatively impact the 
market. 
    The SEC defines illiquid assets as those "that may not be 
sold or disposed of in the ordinary course of business within 
seven calendar days." Funds should hold a maximum of 15% of 
these investments. 
    Protecting retail investors and retirement savers is a 
priority, the SEC said in its 2016 Examination Priorities in 
January. At the end of 2014, 53.2 million households owned 
mutual funds, SEC Chair Mary Jo White said in September. 
    Open-end funds, which are prevalent in 401K retirement plans 
and 529 plans for college savings, need to meet redemption 
requests in seven days, and long loan settlement times can cause 
a mismatch when they are trying to return investor money. 
    It took an average of 19.3 days to settle a loan trade in 
2015, far longer than the seven days recommended by the LSTA, 
and more than six times longer than it takes to close a bond 
trade, which can be completed in three days. 
    The SEC said in the proposal that although firms say that 
their funds comply with the rule on illiquid investments, 
delayed loan settlement times can create a mismatch between 
receiving cash after an asset sale and shareholder redemptions. 
    Revising the definition of an illiquid asset is "unnecessary 
and inconsistent," the LSTA said. 
    Loan funds were able to meet redemptions in previous periods 
of stress, including July 2007 to December 2008, when there was 
more than US$15bn of outflows, the LSTA said. 
     
    OTHER FACTORS 
    The SEC criticized delayed loan settlement times in 
September's proposal, which applies to all open-ended funds and 
ETFs, and expressed concerns about whether funds could meet 
investors' redemption requests in times of volatility. 
    Instead of the six liquidity categories, the LSTA is 
suggesting that the regulator allow funds to determine their 
liquidity needs based on factors such as the redemption 
characteristics of its investors, the liquidity of its portfolio 
and the availability of alternative sources of liquidity. 
    The group, whose goal it said in its letter is to 
"transform" syndicated loan settlement within the next three 
years to make it adhere to standards in other asset classes, 
said loan funds can hold cash positions, invest in securities 
that can settle in three days and hold a line of credit to 
ensure access to liquidity in order to meet redemptions. 
    A settlement mismatch can be covered by credit lines, though 
BlackRock noted in its letter that the credit lines are "rarely 
used." 
    Credit lines for one or several funds run by the same 
manager range in size from US$50m to US$2.5bn, according to an 
LSTA survey of firms that oversee loan open-end funds and ETFs. 
    There was US$115.4bn in assets in US loan mutual funds and 
ETFs at the end of 2015, according to Thomson Reuters LPC data. 
The funds buy leveraged loans that back buyouts such as the 
purchase of Petco by CVC Capital Partners and the Canada Pension 
Plan Investment Board. 
    There have been outflows from loan mutual funds and ETFs 
during the last 26 consecutive weeks, including US$694m during 
the seven days ending January 20, according to Lipper data. 
 
 (Editing By Tessa Walsh and Michelle Sierra) 
 ((jonathan.methven@thomsonreuters.com; Reuters Messaging: 
jonathan.methven.thomsonreuters.com@reuters.net)) 
 
Keywords: LOAN LIQUIDITYREVISE/