Imagine a trillion-dollar market that runs on faxes and phone calls while routinely tying up investors’ money for months before they get any return.
That’s not fiction: It’s the unregulated market for leveraged corporate loans....seeking yield...
The antiquated structure of a market that’s ballooned from a mere $35 billion in 1997 poses a growing threat, raising the odds of gridlock in a downturn when investors expect to get their money back with a click of a button. As of yet, no regulators have taken responsibility for fixing the deficiency....
Some of the worst delays in settlement times can be found in the market for new loans, where Pimco’s MacLean said it’s not uncommon for months to pass before a purchase is completed....
...Investors committed $1.2 billion in October to fund a loan for junk-rated Huntsman Corp. For about 10 months, they didn’t receive a dime.
Salt Lake City-based Huntsman obtained the financing to help pay for its purchase of Rockwood Holdings Inc.’s titanium dioxide business. The merger has taken longer than anticipated because of an antitrust holdup....
While buyers and sellers can trade stocks and bonds among themselves, they need the approval of corporate borrowers before they can exchange loans. Clerks must then update loan documents to reflect new lenders.....
The concern is that there may be a mass exodus from mutual funds that could strain the loan market as investors anticipate rising borrowing costs and defaults. Mutual funds and exchange-traded funds settle investors’ redemption requests within three to seven days, according to Moody’s Investors Service data.
“There’s kind of a liquidity mismatch,” the University of Michigan’s Gordon said. When investors try to redeem and can’t get their money back right away, more will try to pull cash, risking a run, he said.
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