Merrill Lynch Asset Management has reached an agreement for Loan Pricing Corp. to price a Merrill bank-loan fund daily, a move that could pressure other participants in the bank-loan market to do the same.
Loan Pricing was chosen late last week to price the $3.2 billion Merrill Senior Floating Rate fund. Use of an outsider to evaluate the fund is meant to increase investor confidence in the pricing.
The change is expected within a few weeks, sources familiar with the decision said.
A handful of funds price daily, but most do so at longer intervals-and none use outside firms to determine the market value.
Merrill has been pricing its loan portfolios daily but uses market prices gathered internally. By having Loan Pricing make that information readily available, Merrill hopes to gain a competitive edge.
The fund's managers say investors would prefer pricing as close to the market as possible and available at the end of each day, when most mutual funds report.
"Most funds have been pricing their portfolios by what they think the loans in it are worth," said Allison Taylor, head of the Loan Syndications and Trading Association Inc. "But it's a method that varies widely among institutions."
Ms. Taylor, whose organization is preparing a daily pricing service, said a move such as Merrill's should send a strong signal to the market that daily pricing is not only available, but necessary.
"Some would argue that we've been able to do this for a while; some would say we still can't do it," she said. "Everyone agrees it's important to mark what a portfolio is worth at the end of the day."
Merrill's fund has been run since April by Richard C. Kilbride and Paul Travers. Neither returned calls seeking comment.
But it's clear that such a move by the fund would be far-reaching. As of March 31, the fund had invested in 225 companies' loans spread among 51 industries.
The decision by Merrill comes on the heels of an announcement last week by Invesco that it would require its fixed-income institutional funds to invest between 5% and 10% of assets in bank loans to further diversify their portfolios.
Market participants, such as Ms. Taylor, are heralding the moves as a sign that the secondary market has developed enough to foster a new generation of bank-loan funds and to make them more palatable to retail investors.
One fund executive, who manages more than $1 billion in bank loans, said Merrill's decision to price daily was most likely made to distinguish the closed-end fund against the growing number of bank-loan funds.
The number of bank-loan funds has grown from eight to 19 in the last 18 months, according to Lipper Analytical Services Inc. Assets in those funds have grown to $27 billion, from $17.8 billion at the end of March 1998.
Those increasing loan fund statistics have coincided with a boom in secondary market trading, which give managers more flexibility in boosting returns and in diversifying their portfolios. Trading volume of bank loans topped $62 billion in 1997, compared to $20 billion in 1994, according to Loan Pricing.
The creation of loan funds greatly lags that of more traditional equity and bond funds. Analysts say that is primarily because loan funds require more expertise to launch and run.
But as the secondary market for corporate loan paper blossoms, more fund companies are feeling confident about getting into the game, market participants say.
The newfound liquidity in corporate loans has been beneficial to funds because mutual fund investors like the ability to shift assets from one fund to another to catch waves. That requires fund managers to sell loan paper quickly to meet their investors' requests.
