The dealer-based mark-to-market system is becoming more exact and is providing a fairly accurate picture of the secondary loan market, according to a trade data study conducted by The Loan Syndications and Trading Association. Trade data is hard to come by due to the private nature of the loan market, but the growth of the market has made an efficient mark-to-market system a necessity. "The loan business now has many participants who mark to market. Since most auditors and trustees require accurate, reliable, independent marks, availability of this data is critical to the development of the asset class," said Jonathan Calder, head of loan sales and trading at Citigroup and LSTA board member.
The trade data study is able to show that the mark-to-market system is growing more accurate. Although the study found the number of outliers has increased from 2002 to 2003, these outliers are found in logical areas--primarily the weaker credits. The study attributes the growth in outliers to the strain on the credit markets and growth in the distressed debt market. "The most important point is that the dealer quote mark-to-market service or system is actually really good," said Ruth Yang, director of market data for the LSTA. "It does function in a logical, efficient fashion," she stated of the system that provides investors with daily marks. This is a vast improvement from five years ago, when the LSTA was just fashioning a way to provide weekly mark-to-market quotes.
The study compared the variation between trade data points and mark-to-market quotes across seven different variables: facility type, average bid level, bid quote count, trade frequency, rating, facility size, and bid/ask spread. Yang noted that the seven variables used in the study only explain about 14% of the variation between the mark-to-market and trade points. Yang would ultimately like to incorporate variables such as the impact of yield-to-maturity duration and the impact of liquidity, specifically in regard to the trade size as a percentage of the overall facility, into the study. But these variables are tough to quantify, she noted.
The data pool for 2003 includes 3957 trades representing 627 facilities and $14.77 billion in market activity. The trade data study is compiled using two groups of data providers. The first group comprises 12 buyside and sell-side institutions, providing data collected over the first quarter of the year. The year round providers, supplying a data pool between January 2002 and March 2003, are five buyside firms. The LSTA does not disclose the identities of the party participants, but Yang noted that all the participants are LSTA members.