The 18-month old Loan Market Association has a vital role to play in effecting - and responding to - changes in the European loan market. Tim Ritchie, the LMA's chairman, reports on the association's progress and the work that lies ahead.
The Loan Market Association held its second Annual General
Meeting on July 9, 1998. At this meeting, I was pleased to be able
to announce that our membership had grown to 110, and that, as a
result, we had collected sufficient funding to enable us to
undertake all of our planned expenditures for the current calendar
Looking back to the origins of the LMA, less than two years ago, it is difficult not to feel a sense of satisfaction at the way in which things have developed.
Thanks are due to the considerable number of market practitioners who have contributed part of their dwindling amount of free time to assist in this process.
Of course, timing is crucial, and there is little doubt now that the LMA was created at just the right moment as the loan market in Europe was beginning to undergo some fundamental changes, most noticeably in terms of the behavioural characteristics of the mainly European investor base.
Over this period, we have seen an unprecedented increase in focus on returns on capital by lenders, as well as a pronounced shift in the mix of loan business, away from vanilla standby facilities.
There has been a sustained increase in the proportion of situational financings and particularly rapid growth in the number of larger leveraged loans, the latter market aided by the development of the European high yield bond market.
These and other changes have combined to force market practitioners to operate in a more business-like fashion than previously and have made the existence of the forum for discussion and implementation of changes, which the Loan Market Association provides, much more important and relevant.
At our AGM, I ran through updates of the activities of the various committees through which the LMA operates. I have reproduced highlights of this presentation below and added commentary selectively.
* Survey of UK-based borrowers and banks
* Training and conference programme
* Web site
Under the auspices of the Bank Relationship Consultancy (BRC), we have conducted a survey of a wide range of corporates - gauging, among other things, their receptivity to the growing practice of loan transfers by banks.
Not unsurprisingly, we discovered inconsistencies between the perspectives and plans of borrowers and banks on this topic, suggesting that bankers still have a selling job to do here. However, it was revealing that, despite their reservations about the practice, about 90% of corporates expect the market for loan sales to grow.
We unveiled the LMA web site at the AGM. The site will shortly be accessible at loan-market-assoc.com by members and non-members alike. I encourage you to pay a visit!
* Standardise aspects of primary documentation
* Refine and update Standard Form Documentation for Par Trading
Working with our legal panel we have identified areas which lend themselves to a more standardised and simplified approach.
Drafting has commenced and we are still on track to make recommendations to our members during the second half of this year.
Interestingly, the BRC study also revealed that the vast majority of borrowers expect that loan documentation will become more standardised.
A recent survey of members suggests that the LMA Documentation for Par Loans has been accepted as the standard for market activity in Europe. Looking ahead, we will continually refine this based upon feedback from market practitioners.
Settlements and Trading Practices Committee
* Code of Practice
* Forum for resolution of disputes
Our Code of Practice was launched on April 15, 1998.
We have subsequently identified about 20 potential panellists who can be called upon to offer guidance with respect to any disputes which arise in a trading context.
* Quality of monthly survey data
We are now collecting indicative prices from over 20 institutions. The quality of the data has improved substantially, with narrowing bid/offer prices. We have included a number of distressed names and henceforth will be making historical data available to new participants in this process. Additionally, we have been performing periodic surveys of market activity, which lead us to believe that secondary market growth has accelerated further during 1998. (See graph opposite.)
Portfolio Management Committee
* LMA Paper on Good Portfolio Management Practice
* Questionnaire for members
* Regulatory Capital Treatment for loans
In this area of growing interest for lenders, we are putting the finishing touches to a paper offering guidance to bankers about this developing discipline. The results of the questionnaire distributed with our May newsletter are being analysed. We have also made recommendations to the Bank of England in the context of its Pre-Consultation paper regarding credit derivatives.
* Standard documentation
* Recommended definitions and clauses
Draft confirmation and standard terms and conditions have been drafted and reviewed. A draft model set of reps and warranties has been prepared. We are targeting a launch date for these items later in the year.
We have also added several new faces to our board of directors, which now includes the following individuals:
- Bank of America - Tony Tucker
- Banque Nationale de Paris - Julian van Kan
- Barclays Capital Group Tim Ritchie
- Commerzbank AG - Elaine Sanders
- Goldman Sachs - Simon Mullaly
- Greenwich NatWest - Chris Porter
- HSBC Investment Bank PLC - Cameron Marr
- Lloyds Bank - Christopher Shawyer
- JP Morgan Securities Ltd - Susan Pritchard
- Royal Bank of Scotland - Christopher Elliott
- The Fuji Bank, Limited - Kim Humphreys
- The Sumitomo Bank Limited - Tim Emmott
- Warburg Dillon Read - Ian Drew
It is good to have some new volunteers. It is essential to our
progress that we continually introduce new perspectives on the
market and also that we are seen to represent all market players
and not just the interests of a few major houses.
Another development which the LMA welcomes is the creation of a parallel organisation in Asia, the Asia Pacific Loan Market Association.
Both we and the US-based Loan Syndications and Trading Association took steps to encourage the formation of this organisation by market practitioners across Asia, in the knowledge that global standards will become increasingly important for the market. We all wish the APLMA the best of luck!
So what next for the LMA, and whither the secondary loan market in Europe?
Well, as you can see, we have quite a few initiatives underway, and expect to deliver plenty of tangible results before the end of 1998.
From a documentation perspective, we are now more focused upon the primary market, where we foresee potential cost savings for borrowers and lenders alike through standardisation of loan documents.
However, we remain very much committed to seeing the secondary market for loans continue to grow.
In this regard, it is interesting to note that, in the absence of a substantial leveraged loan market, a much greater proportion of activity in Europe (than in the US) has involved investment grade paper.
While I would expect that we will continue to see trading in the major acquisition loans which now routinely incorporate free transferability, one wonders whether we are not just going through a phase of readjustment in investment grade portfolios, after which a much greater proportion of trading than at present will derive from the increasing range of highly leveraged situations, as is the case in the US market.
Of course, one would still expect investment-grade loan risk to be transferred, whether by credit derivatives or through securitisation structures.
In this context, it is significant that the results of our survey with the BRC indicated that well over 80% of corporates surveyed wanted to know where the economic interest in their risk ultimately resides. One wonders how this apparent inconsistency will ultimately be resolved?
As ever, we continue to look for volunteers to join our various committees, as well as new members. If you have an interest in either topic, please contact Barbara Brownlee on 0171-282-7331.