The start of the fourth quarter usually spurs both great quarterbacks and attentive bankers into action.
Quarterbacks try to score as many points before the clock runs out, while bankers scramble to get their loan portfolios in order before annual report time.
One of the key mechanisms banks have used this time of year is their loan trading desk. Also called the secondary loans desk, this division buys and sells loans for its investment customers and for its own portfolio.
Following a blistering pace in loan trading for the first three quarters of this year, trading of both distressed and par loans is expected to be even heavier as yearend approaches.
Industry followers say that trading volume for both distressed and nondistressed loans is about equal right now.
Driving the market for distressed loans are some macroeconomic factors, bankers say.
"The economic recovery is reducing the amount of distressed loans outstanding and is increasing the quality of the loans," said Jonathan Calder, head of bank debt trading for Citicorp Securities Inc.
Movement and changes in the value of Macy's debt provides a good illustration of how the economy has affected trading of distressed loans.
Banks owning the original loan when Macy's filed for bankruptcy ran into balance sheet problems. To lower their nonperforming loans, they sold the loans to high-yield investors who were looking for returns in the 25% to 28% range.
Federated Department Store's efforts to buy Macy's increased the price of the debt dramatically. Some of the high-yield investors cashed out, selling to high-yield mutual funds, which expect returns closer to 14% or 15%.
The further Macy's proceeded out of bankruptcy, the lower the return on its original debt. Each change in debt profile attracted a different kind of investor.
"You have to see these bankruptcies as pieces in a progression," said William Bokos, managing director of secondary loan trading at Chase Manhattan Corp.
As with other investments, the returns on a loan diminish in direct relation to the risk.
Ironically, several banks that traded or sold their original loans in the distressed arena to investors are now looking for a piece of either the original loans or a refinanced issue.
"Many of the banks that were sellers of distressed assets are now buyers, and many of the investors are now important sources of product for the banks to buy," said Mr. Calder. Right now, he said, there is a good market for distressed loans.
Bank demand for assets is generally said to be the main factor behind recent growth in trading of nondistressed loans at par.
Some secondary loan traders think the trading business gives foreign banks a way to acquire assets in a distant market.
"Foreign banks who do not have a large origination staff can obtain assets in the secondary market, even if they are not invited into the loan," Mr. Calder said.
European institutions have shown an interest in loan trading in their own market. Seizing this opportunity, Citicorp, J.R Morgan & Co., Merrill Lynch Inc., and a host of others have opened loan trading offices in European cities.
Those who have joined a loan syndication sometimes want to change their level of commitment. Oversubscribed loans may give banks a smaller piece of a loan than they had originally hoped. A bank that committed $75 million to a credit but was allocated only $50 million may be willing to buy into the secondary market to increase its commitment.
Banks in general have used the secondary market as a way to control the concentration of their loan portfolios.
"There is a fundamental change in the banking community," said Mr. Bokos. "Banks are not looking at individual loans as discrete relationships. They are trying to ensure that their loan portfolios are diversified geographically and by industry."
