Live-Blogging the LSTA Conference

Below, my preliminary notes from the LSTA’s 16th Annual Conference on November 2, 2011.

4:47 PM
Breakout session on Material Non-public Information in the Syndicated Loan Market. Best practices are under pressure due to occurrences in the market, including especially the desire for increased transparency. History of LSTA involvement on MNPI. Sophisticated party expectation of unequal information of parties trading loans. Syndicate Level Information discussed. Sources of authority: state asset protection rules, federal securities laws. Big boy provisions as “contractual disclaimers of reliance” that operate by reverse engineering a fraud claim. Limits on effectiveness of same: securities transactions (SEC not require to prove reliance); prohibition against circumventing securities laws; ineffectiveness against breach of fiduciary duty claims unaffected by CDRs; “blockbuster” information (read, Borrower Restricted Information on material issues) arguably unprotectable.

10b5 compared–“duty” as a plastic notion; classic and misappropriation theories compared (corporate insider breach of fiduciary duty, including Dirks temporary insiders, vs. outsider breaching confy, then using information). Does trading look fair?–always a question that can be asked. The disclose or abstain rule. Reves factors reviewed, suggesting loans are not securities. Areas of concern. Dodd Frank. SEC and CFTC now brought into the mix. WAMU Debtors’ disclosure of cleansing facts didn’t include term sheets. Holders traded after expiration of NDA. Trades were some long, some short. Ad hoc committee roles discussed. Here, committee played vital role. Rule 2019 regulating ad hoc committees being updated.  Duties to the rest of the class. Judge Walrath cites temporary insider theory; probable expansion of Dirks. Holding a blocking position also potentially gives rise to a duty. Does controlling person under insider definition of Code equate to insider under securities laws? Finally, there is the issue of when settlement discussions constitute MNPI, especially once there has been substantive response from the debtor. Creditors’ committee wasn’t allowed to rely upon the debtor’s performance of its contractual duty to cleanse the information. This was held to be inappropriate reliance upon the debtor. Court did not feel giving up right to trade was an undue burden on the creditor, i.e., that disclose or abstain rule still should have applied. Take-aways:  kitchen sink disclosure still makes sense for MNPI. Don’t assume you know who the complaining holder will be (WAMU, a pro se individual equity holder). Consider antipathy of court towards claims trading and “insiders advantaging themselves” approach in particular. Don’t overly rely upon precedent and technical compliance in the current hyper-regulatory environment.

3:45 PM
Breakout session on settlement opportunities and challenges. First, Loanserv’s reconciliation. Two lender types–full, or onscreen. Citi has been using this platform for a while, finds it useful. JPM’s process, went live in 2009, Misys via Smartnetwork daily feed. Loan Serv real time data resolution issues, online to DTCC, way to find out if match up with Agent positions. Cash on Transfer discussed next. Agent signature held back until funds are up. Agents no longer transfer based on signatures on A&A. Big reduction in costs of multiple wires for dealers. As alternative to having collateral posted for particular individual investors. BNY Mellon representative admits that COT does not make things easier yet, as it represents a small minority of trades at this point. At this point, there are only two agents doing this. Buyers have no obligation to sign up for this. Next, a segment on FPML messaging for agent bank notices, inventory messages, and trade messages.  Legal memorandum was being issued by Davis Polk relating to the electronic signature issue.

2:32 PM
Afternoon session: a view from the buyside, general discussion of fundraising and future prospects.

12:24 PM
Now, secondary loan trading. Average bids now closing in on 92, as in 2007. Mutual funds going from net buyer to net seller during August, leading to a drop of 450 basis points. October went from 87 to 92.  Buyside also has gotten a lot bigger than sellside. Mutual funds as having limited flexibility when they have redemptions. Market makers holding less inventory due to worries over market volatility. Annual trading volume for 2011 on an annualized basis projected to be $438 billion. Audience poll reflects an expected repeat of same for next year.

11:24 AM
Next panel now under way, Current State of the Leveraged Loan Market. First topic, volatility. Market on surface looks much better than 2008, but daily loan price volatility is high, with “high beta names” moving several points a week or even a day. One culprit, a huge drop in dealer inventory. Another: Europe, where the DAX is still off by more than 25%. Primary gyrating, spreads wide. Audience votes Europe as by far the single biggest factor. Panelist cites dealer inventory also as a huge factor here. Cycles in loan price levels also coming much closer together, with two distinct pronounced identifiable dips in a 15-month period. Another factor id’d–big change in type of investor–total-return type investors instead of CLO’s. Much more correlation also seen now–with events driving moves. Outflow seems to have stopped, some more institutional interest, but if Greece blows up, who knows? Credit quality appears to be significantly better, Europe appears to be clearly worse. Audience votes that biggest difference since 2008 is reduced leverage, with Europe a close second. Raising funds more difficult now, because in part people are scared. From a macro point of view, one panelist noted that “there is way too much debt in the world . . . we are all tied together. . ..” The global economic impact of a European double-dip recession discussed. US credit quality described as about as good as many analysts have seen after a correction in a long time, with the actual default rate rapidly approaching zero. Institutional reissuance may finally be up, but a lot of it is refinancing, leaving supply largely unchanged. Hedge funds and high yield funds are gaining market share, with CLOs dropping. This difference is especially pronounced for lower rated companies. Large loan and high yield mutual fund outflows this year. This behavior in the loan market almost mirrors the situation in the high yield bond market. LIBOR spreads are at historical highs, but bid-ask spreads are also very wide. Outlook for assets classes: CLOs continue have been poor but are now well-priced. Some concern loans may become more expensive. Another panelist opined that the money is there, the biggest issue is volatility. Global deleveraging and loan market investors not being leveraged but investing cash themselves.

10:17 AM
A regulatory lawyer began the panel on regulatory reform by discussing how Dodd-Frank began as a very partisan exercise, and how its implementation continues to be subject to the political winds. Over the short-term, most of the changes are likely to be regulatory, as opposed to outright repeal. A second lawyer discussed that a definitional change in Dodd-Frank now makes it clear that it applies to loan swaps–and that it in turn will likely require a public/private decision to be made before swaps are actually done. Manish Mital at Halcyon complained that the regs prevent firms from being more conservative and hedging their risk. SEC Rule 9(j)(1) may deem conduct that could affect a referenced credit to violate Rule 10(b)(5) as a market manipulation. The WAMU litigation in Delaware Bankruptcy Court referred to as an example.  Effect of regulations on loan participations being discussed with CFTC and SEC, which originally limited carveout only to bank-granted participations. This was fixed, but they are still working to eliminate a distinction between LSTA “true participations, and LMA participations. The Volcker Rule also discussed, especially as it relates to ownership of private equity funds and CLOs–and also how it could limit the ability of banks to make markets participated in by other CLOs. Key point emphasized on CLOs–rules don’t go effective until 2013. The extreme hardship for hedge funds to put the administrative and compliance machinery in place discussed. FATCA’s broad sweep also discussed. Modifications currently under discussion.

9:24 AM
Former US Senator Judd Gregg discusses his views that excessive government borrowing, abroad and in the US, is the culprit in the current world financial crisis. He argues vociferously in favor of large entitlement cuts by the Congressional Supercommittee.

9:14 AM
Bram Smith of the LSTA is reviewing developments during the past year. New Distressed BISO Rules, intended to give performing parties means to terminate long delayed trades. Amicus briefs filed in several cases, including the credit-bidding case before the US Supreme Court. Lobbyist hired to assist with efforts on financial refulatory reform. Marketing domestically and overseas to try to reverse shrinking of the asset class.

9:03 AM
Conference ballroom filling up. Introductory speaker, Alicia Sansone, notes that this is not 2008, but also observes that the graphic – a descending roller coaster – for the conference materials is the same as in 2008.

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