Credit Suisse First Boston is set to eliminate all assignment fees on CSFB-agented deals, no matter which firm trades the bank loans, as long as counterparties agree to settle electronically. The move is designed to spur use of electronic settlement in the secondary loan market, where par trades settle T+10 and distressed trades can take months. It also confronts the thorny issue of assignment fees, which annoy investors and draw testy lines between dealers.
Many of the larger sell-side banks already have arrangements where they waive assignment fees on trades that happen in each others deals, but there are still a few that apply assignment fees to others' trades, notably J.P. Morgan and Bank of America. This new proposal would apply to everyone regardless of the reciprocal "gentleman's agreements." Officials at J.P. Morgan could not be reached and a spokesman at the bank did not return calls. Officials at Bank of America did not return calls and a spokeswoman declined to comment.
Buysiders cheered the effort, citing the hope that it should increase liquidity in the secondary market. "It's a positive step toward enhancing liquidity," said Chris Pucillo, portfolio manager at Stanfield Capital Partners. He added the provision would likely help trades close in a more timely manner. That's the ultimate goal, said Don Pollard, co-head of CSFB's syndicated loan group. "We are offering this incentive as a catalyst to encourage the loan market toward electronic settlement," he said.
Although start-to-finish electronic settlement systems are not yet available to the loan market, CSFB is using this provision to encourage counterparties to begin to use the online platforms that do exist to submit documents to its agency department. These platforms, which employ the use of electronic signatures, allow parties to produce, complete and disseminate documents online.
Current assignment fees can cost lenders $3,500 per trade, but that amount is derived from a time when the documentation was more cumbersome, explained dealers. Overall, by conservative estimates, assignment fees could cost the market roughly $50 million a year. "In the high volume shops, [charging assignment fees] is a moneymaker," noted one dealer. Now that standardized documentation has been installed, administering a trade is probably a couple of hundred dollars, dealers said.
In addition, due to higher volumes and the smaller-sized trades, assignment fees are taking bigger slices out of each transaction and buyside accounts often get hit with multiple fees as they trade paper into the different funds under their umbrellas. "The number of transfer fees paid are up about 50% over the last two years and those fees along with extended settlement periods are undermining liquidity in our market," said Pollard.
While the new provision would in theory apply to the trading of both par and distressed loans, currently there are no applications that can handle the settlement of distressed loans. CSFB said it would be willing to use any type of electronic system. The new provision will become effective in conjunction with CSFB's rollout of its recently syndicated Burns Philp $270 million "B" term loan.