Loan Prices Provide Best Recovery Info
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Loan Prices Provide Best Recovery Info

Loan prices in the secondary market before and after a default may give a better indication of ultimate recovery rates than bond or credit-default swap prices, according to LMW sister publication Derivatives Week.

Loan prices in the secondary market before and after a default may give a better indication of ultimate recovery rates than bond or credit-default swap prices, according to LMW sister publication Derivatives Week. This implies that the loan market is less likely to be surprised by a default event than the bond and credit derivatives markets, according to Edward Altman, the Max L. Heine professor of finance at the Stern School of Business and director of credit and debt markets research at the NYU Salomon Center.

The findings, presented at last week'sCredit & Counterparty Risk Summit, held by the Global Association of Risk Professionals at the Warwick Hotel in New York, led to debate among market practitioners over whether the loan market can flag concerns on credits ahead of other markets, a role that has previously been allocated to the credit derivatives arena.

One derivatives practitioner scoffed at the notion that the loan pricing could offer more timely information, saying that if any such lag developed hedge funds would immediately arbitrage the difference and close the gap. The idea that loan prices may reflect concerns ahead of other markets also raises concerns about the Chinese walls separating banks' lending operations, which due to monitoring the loans is privy to material non-public information, from their trading operations. Altman noted that when selling loans in the secondary market banks typically retain a portion of the book and thus continue monitoring the loans.

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