Some loan market participants are pushing for the elimination of borrower consent for sales of funded term loans. Even though this could promote liquidity, speed settlement of secondary trades and reduce costs, it does not sit well with issuers, especially financial sponsors, and some arrangers and dealers.
In an opening salvo, The Loan Syndications and Trading Association (LSTA) is holding a meeting next Tuesday at its New York office to discuss the proposal, with one lawyer noting it is likely to be a "lively debate." Though it has been on the to-do list for some time, the Primary Market and Agent Transfer Practices Committee is now considering articulating it as a market standard. "The loan market is the only capital market where consent is required on a trade and if the LSTA's goal is to promote liquidity, you cannot keep putting this off," said one buysider. Officials at the LSTA declined comment.
Borrower consent is required for loan trades for any new borrower. So if a buyer, a hedge fund or institutional investor or even a bank, wants to buy a new loan, the borrower needs to approve the sale. "It definitely is problematic at times. It just adds a level of complexity that may be unnecessary in certain cases," a trader said. "Agent banks, borrowers, buyers and sellers have to sign the assignment agreement, so if you take out one of the requirement needs, it could speed up trades," said a dealer. A West Coast-based loan manager added, "If you have a CLO on the verge of blowing up, you can be waiting for consent while the cfo is out of the office for a week on vacation."
Eliminating borrower consent for term loans will also mean that an institutional investor or bank could automatically get into a deal, the dealer said. "Issuers do not like this. They want to know who owns the paper and financial sponsors particularly have the most to lose," responded the buysider. He added that the proposal is only for funded term loans trading at par right now. Revolvers or delayed draw loans would still require consent as the issuer would need to know the lender had the available capital. "If we are trying to make [the loan market] like other capital markets and promote liquidity and talk about what the best practices should be, then fully funded term loans should not require borrower consent," he argued.
A distressed trader responded, "The issuers want that consent because what happens in a takeover where you buy all the senior debt and you get control of the company? The big dealers don't want to lose control. They want to keep the issuer happy and don't want to lose control over the process." The buysider countered that from an investor perspective there should be freedom to sell to anyone. He added that when the markets are good, such as right now, investors are comfortable, but when the markets turn, it's a problem if investors cannot sell loans.
However, even if the LSTA supports this as a market standard, it would only become a goal and would be drafted in credit agreements. A lawyer said sophisticated borrowers and big financial sponsors would still be able to bargain. "If it goes through it'll be interesting to see how it goes through because I don't think it could be applied to every single deal," another dealer commented.
