Unregulated, unpredictable, and illiquid.
For years that has been the consensus about the secondary market for syndicated loans and one that the fledgling Loan Syndications and Trading Association is struggling to change.
This week, the association announced new guidelines for secondary loan trading. The measures, which provide members with a step-by-step trading contract, take effect Sept. 15.
"A lot of people said a standard form was an impossibility, that it could never happen," said Stephen Blauner, an attorney who helped draft the guidelines. "I think it bodes well for the LSTA in its effort to bring increased liquidity to the secondary loan market."
Trading guidelines are the latest effort by the 3-year-old association to bring to syndicated lending the same level of accountability and standardization found in other capital markets. It comes in addition to a weekly trade reporting system launched at the end of 1996.
The new guidelines require a 20-day limit for closing distressed-loan trades. Should the deadline pass, sellers are required to pay buyers interest and fees for performing loans; buyers are required to pay the seller the cost of carrying nonperforming loans.
Thomas Hudson, a Goldman Sachs & Co. trader who leads the association's distressed-debt committee, said the association is responding to a widespread problem in the secondary loan market: expensive trades that drag on for months.
As Mr. Blauner explains, as recently as last year, loan trades would regularly take 12 to 16 weeks to close compared with bond trades that can happen in a few days or less. Arguments over trade contracts would regularly cost traders as much as $15,000 in legal fees.
Some conformity has entered the marketplace on its own, however, cutting closing periods to four to six weeks and legal costs to around $6,000, Mr. Blauner said, but added, "That's still too long."
Such delays and fees have kept potential buyers and sellers on the sidelines as the market earned a reputation of being illiquid, according to Mr. Blauner.
"What the LSTA is doing now is fighting an uphill battle against banks and legal firms," said a leading secondary market trader. "The banks want to keep this business proprietary and the legal firms want the business of drawing up new contracts for every deal."
But, the participant said, the association will likely win out, in part, because activity in the secondary market continues to boom. Loan Pricing Corp. reported $20.5 billion in secondary market trades in the second quarter, up 32% from the same period a year ago.
Through the first half of 1998, $35.6 billion in syndicated loans were traded-$6 billion more than last year and three times the amount traded in the first half of 1994.
Mr. Blauner concedes the association is reacting to existing problems in the market as opposed to preventing future ones.
"There's a lot more to do," he added. "We're addressing the concerns of the market."
Under its executive director, Allison Taylor, the association has eight working committees and has scheduled its first full-day conference next month in New York. The group also is working with similar organizations in Hong Kong and London.
"There's a lot of projects on the drawing board," Mr. Blauner said.