Secondary trading and loan portfolio sales

Background

Distressed companies usually see their debt being traded on the secondary market at prices below par/face value.

The original lenders of record (eg banks or lenders which originated the loan) may be keen to sell their debt exposure on in the secondary market to reduce their exposure to a particular debtor or sector (see Practice Note: Secondary trading of distressed debts).

In complex restructurings, excessive debt trading can make negotiations with key creditors difficult if they are constantly changing in a 'revolving door' scenario.

The Loan Market Association (LMA) (Europe's trade association for the syndicated loan markets) has made significant progress in standardising documentation and processes.

Secondary debt trader tactics

Typical secondary debt trader tactics include:

•
seeking an enhanced yield
•
seeking a capital gain
•
a 'loan to own' strategy
•
competitor insight
•
blocking majorities

In some cases, the borrower or one of its affiliates may seek to purchase the loan through a debt buy back. For further details, see Practice Note: Debt buy-backs.

The proper law doctrine (see Practice Note: The Gibbs rule) provides

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