TSI Settlement System To Handle Distressed Loans
February 23, 2010
Trade Settlement Inc., operator of an automated syndicated loan processing system, said that it has upgraded its platform to allow for the settlement of distressed loans.
Buyers and sellers of distressed loans can now exchange the necessary documentation required to settle the loan trades electronically rather than through fax or the mail.
The counterparties can also incorporate their attorneys into the workflow process which will reduce the time it takes to settle the distressed loan trade to about one week as long as the seller has sufficient inventory and there are no legal obstacles.
Currently, the average cycle for settling a distressed loan – transferring the ownership of the loan from the seller to the buyer -- is about two months. The Loan Syndications and Trading Association, the New York-based trade group for syndicated loans, has advocated a twenty day settlement cycle.
The longer the time it takes to settle a distressed debt transaction, the greater the potential for the bankruptcy of one of the counterparties or the issuer itself. That means that either the buyer or the seller would not receive its securities or the value of the distressed debt could plummet.
“We have put in place a tremendous opportunity for market participants to improve the efficiency of post-trade processing of distressed loans,” says Pat Loret de Mola, president of TSI in New York. “The industry wants and urgently needs an automated settlement platform to help achieve business and operational goals.”
In addition to reducing the time it takes to settle a distressed loan transaction, TSI’s upgraded platform, says de Mola will also reduce the legal costs involved which could amount upwards of $5,000 per trade for each counterparty.
De Mola says that TSI will charge firms a flat fee of “several hundred dollars” to settle a distressed loan – about double what it charges for a syndicated loan.
While most syndicated loans are sold at par or close to par, distressed loans are sold below par, reflecting the financial woes of the corporation or borrower which issues the loans. According to industry surveys, the volume of distressed loans traded in the U.S. alone reached about $140 billion in 2009, more than double the previous year, in part due to increased activity from hedge funds.
TSI operates one of two settlement systems for syndicated loans but is considered the first to offer a fully automated system for distressed loans. Last month its far larger competitor in the syndicated loans market ClearPar was bought by Markit Group.
