NEW YORK - A group of U.S. banks is taking initiatives to standardize practices in order to lure junk bond investors into the syndicated bank loan market.
"In my view, the leveraged loan syndications market is a securities business and should be treated as such," said Catherine Yelverton, vice president and loan trader at J.P. Morgan Securities.
An initiative called "T+10" is being discussed by 15 banks and investment banks, which proposes the following measures:
*To settle secondary loan trades within 10 business days.
*If trades are not settled on the 11th day, the seller of the loan will reimburse the buyer at the applicable margin over the London interbank offered rate until the trade is settled.
*If after 20 days the trade is not settled, the buyer is free to buy the loan elsewhere and the original seller must compensate the buyer for any difference in purchase price.
The policies were to be implemented on Sunday.
"The new liquidity is going to come from high yield investors and the reason there is this interest is the diminishing issuance of junk bonds in recent years," Ms. Yelverton said. "We have a lot of investment banks entering the loan market and as a result standards and bond market practices are being imposed in the loan syndication market."
J.P. Morgan's objective in joining the new initiatives is to make the asset class more investor-friendly and encourage high yield investors into the loan market, Ms. Yelverton said.
"I think this is a good thing for the market because it will make new entrants more comfortable and it will tighten up the existing business," said Jeff Glasse, director of loan trading at Toronto-Dominion USA Inc.
Ms. Yelverton said mutual funds, insurance companies, and some money managers have recently been active in the loan market on either a cash or credit derivative basis. Another informal initiative being taken by some banks is sending "sanitized books" when syndicating loans. The sanitized books contain only public information, allowing bond investors to participate in both bonds and loans for the same issuer.
In a related development, Bankers Trust New York Corp. and Goldman, Sachs & Co. have reset syndicate invitations to give them a similar format to bond prospectuses.
Taking part in the initiative are BankAmerica Corp.; Bank of Montreal; Bear, Stearns & Co.; Chase Manhattan Corp., Chemical Banking Corp., Citicorp, First Chicago Corp., NationsBank Corp., and Toronto-Dominion. - Reuters
