TRLPC: Sankaty, 3i meet to improve loan settlement times after SEC criticizes delays

Blackrock Capital Investment

05/02/2016 14:33

By Kristen Haunss 
    NEW YORK, Feb 5 (Reuters) - Investors in the US leveraged 
loan market are seeking to cut the time it takes to complete a 
trade as regulators warn that funds may not be able to meet 
redemptions during volatility. 
    Bain Capital affiliate Sankaty Advisors, 3i Group and 
Oaktree Capital Management were among the approximately 40 
investment firms and banks that participated in a meeting 
January 27 with Virtus Partners, a fixed-income services 
provider that runs Virtus Trade Settlement, to discuss how to 
speed up the loan settlement process that takes six times longer 
than other asset classes. 
    In a September proposal to improve mutual fund liquidity 
risk management, the US Securities and Exchange Commission (SEC) 
criticized long settlement times in the leveraged loan market. 
The regulator said firms that hold securities with longer 
settlement periods "raised concerns" about a fund's ability to 
meet redemptions. 
    "If the market doesn't find and adopt solutions in short 
order, we're going to go the principal's office real soon and we 
won't like detention," Jason Rosiak, head of portfolio 
management at Newport Beach, California Pacific Asset 
Management, said about the loan market working together to 
shorten settlement times. 
    The SEC said in its 2016 Examination Priorities released 
last month that protecting retail investors and retirement 
savers is a priority. 
    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 funds try to return investor money. At the end 
of 2014, 53.2m households owned mutual funds, SEC Chair Mary Jo 
White said in September. 
    It took, on average, 19.3 days to settle a loan trade in 
2015, according to Markit data. The loan trade group the Loan 
Syndications and Trading Association (LSTA) recommend loan 
trades close in seven days. It takes three days to complete a 
bond trade. 
    "Loan settlement times are a problem because [mutual funds] 
need to meet redemptions within seven days," Stephen Tu, a 
senior analyst at Moody's Investors Service, said. "If you try 
to sell a loan and the average settlement times are still 20 
plus days, and could be significantly longer, that goes against 
the basic function of what [these funds] do because you can't 
get cash from the proceeds of the sale of a loan to meet 
redemptions." 
    The SEC proposal would require the classification of the 
liquidity of the assets invested in by mutual funds and 
exchange-traded funds (ETFs), ranking holdings according to the 
time it would take to sell the asset. 
    Credit Suisse Asset Management, BlackRock and the LSTA were 
among firms that wrote to the SEC last month asking it to revise 
parts of the proposal, including the liquidity ranking, which 
they say could hurt the funds. 
    "There is pushback [from the market] against the core 
definition of the liquidity measurement, assigning days of 
liquidity to every asset," said Neal Epstein, senior credit 
officer at Moody's in New York. The response has been "uniformly 
negative so [the SEC] is going to have to revisit." 
    In a meeting at the Kimberly Hotel in New York last month, 
representatives, both in person and on the phone, from firms and 
banks that also included UBS, Angelo, Gordon & Co, MJX Asset 
Management, Centerbridge, Pacific Asset Management and 
BlackRock, discussed the issues surrounding long settlement 
times, investors said. 
    Spokespeople for the firms either declined to comment or 
didn't return telephone calls seeking comment. 
    Virtus may set up a smaller subgroup of investors and banks 
to continue to work together to address settlement issues, said 
Robert Tomicic, Virtus co-founder. 
    Participants discussed some specific back-office issues that 
need to be addressed, as well as the cost to upgrade technology 
needed in order to be able to improve the process, investors 
said. 
    "Investors realize there may not be one silver bullet out 
there and they have to choose a few solutions," Rosiak said. 
 
 (Editing By Michelle Sierra and Chris Mangham) 
 ((jonathan.methven@thomsonreuters.com; Reuters Messaging: 
jonathan.methven.thomsonreuters.com@reuters.net)) 
 
Keywords: LOAN SETTLMENT/