A liquid secondary market is essential to a healthy primary market. Lenders who can sell positions are better able to manage risk and free up capacity for new lending, and investors gain access to an asset class that would otherwise be hard to reach. This guide sets out how a secondary loan trade works, from agreement to settlement.
Par and distressed trading
Secondary trades are broadly divided into two types. Par trades cover performing loans, typically trading at or near their face value. Distressed trades cover loans to borrowers in, or at risk of, financial difficulty, and involve additional documentation and due diligence reflecting the greater risks involved. The LMA publishes standard trading documentation for both.
Agreeing and confirming the trade
Trades are usually agreed by phone or electronic messaging, at which point a binding agreement exists. The terms are then recorded in a trade confirmation that incorporates the LMA's standard terms and conditions. Standardised terms mean the parties only need to agree the commercial points, such as the facility, amount, price and settlement method.
Transfer mechanisms
How the buyer acquires its interest depends on the facility agreement and the parties' needs. The most common methods are:
- Transfer by novation, under which the buyer becomes a lender of record in place of the seller.
- Assignment, under which the seller's rights are assigned to the buyer.
- Funded or risk participation, where the seller remains lender of record but passes economic exposure to the buyer.
Lenders who can sell positions are better able to manage risk and free up capacity for new lending.
From trade date to settlement
Between trade date and settlement, a number of steps must be completed: obtaining any borrower or agent consents required by the facility agreement, completing know-your-customer checks, preparing and signing transfer documentation, and calculating the settlement amount, including any adjustments for interest and fees.
Where settlement is delayed, the LMA's standard terms include provisions dealing with the economics of the delay, so that neither party is unfairly disadvantaged.
Making settlement faster
Settlement times in the loan market are longer than in many other asset classes, and reducing them is a priority for the market. Initiatives include greater use of electronic trading and settlement platforms, more standardised data, and documentary changes that streamline consents and transfers. The LMA works with members, platforms and agents on these initiatives.
Find out more
Our secondary trading documents and user guides are available to members in the documentation library, and our secondary trading training course provides a detailed introduction for those new to the market.
