Sunday, 16 December 2018

The LMA turns 10

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Europe's Loan Market Association (LMA) is now ten years old. Since its inception it has grown from a small organisation focusing on the development of the then nascent secondary loan space to become the voice of the European market. Today the LMA remains as significant as it was a decade ago and focuses on market’s new challenges. David Cox reports.

Ten years ago, in response to the growth of secondary loan trading in Europe, the LMA was founded in London with seven members. In 1996, the European loan market was on the cusp of a merger fuelled boom that would see volumes rocket. But at that point deals were small compared to the jumbos that are common today, while the secondary market was little more than a side show.

"The association was initially focused on the development of a legitimate secondary loan market in Europe; 'liquidity' was, and still is, the mantra," said Tim Ritchie, the LMA's first chairman and head of global loans at Barclays said.

Interest in secondary trading initially came from banks' increasing need to free capital as returns from primary lending were low, while shareholder pressure for better returns on equity meant there was a renewed focus on risk and portfolio management.

"In 1996 there was no organised secondary loan market as such. There were some isolated secondary sales, but buying and selling loans in the secondary market was generally frowned upon, with many sales being tainted by their linkage to failed primary syndications," said Ritchie. "However, at this time a more sophisticated approach to lending was beginning to emerge in Europe, with a number of banks beginning to employ more rigorous capital allocation models in the lending context."

The need for standardised practices was pressing and the LMA had produced secondary trading documents by September 1997. This gave the market an impetus and rapid development followed. "The end of the 1990s saw a number of large acquisition facilities, specifically in the telecom sector. As a result, secondary trading in investment credits soon became entrenched and without this syndication of many of these transactions would have been more challenging," said Ritchie.

With the secondary market becoming established, the LMA broadened its focus and moves to standardise the primary documentation.

"Borrowers soon came to recognise that the LMA document provides a good framework from which to start discussions," said Kim Humphreys, head of corporate and sovereign syndications at Mizuho Corporate Bank, who took over as LMA chairman last year. "And since its inception there has been an open dialogue with organisation such as the Association of Corporate Treasurers and there have been several revisions. The document takes the drudgery out the loan process and has standardised the 'boiler plate' clauses that previously could take days of work".

The LMA soon moved away from being London centric to having a European focus, producing standard documentation under French law and a series of initiatives including roadshows in Germany, Spain, Dubai and Prague.

As the market continues to develop, so do the LMA's efforts to meet the challenges that development brings.

"Since the LMAs inception there has been an influx of non-bank funds into the European loan market. Everybody welcomes this increase in liquidity but it means the bank market must adjust the way it does business," said Humphreys. "Non bank investors now represent 50% of the leverage market and not to involve them would be short sighted. There have been a number of initiatives to bring the funds on board and we now have numerous non-bank members."

The LMA has also worked to increase the market's profile, including the successful lobbying to the UK treasury to allow interest relief on ratchet loans and to revise the Treasury's rules on interest payments to corporates.

The LMA's membership has developed along with the market and it expanded from its seven founders to have almost 300 members today. The association is now focusing on the implications of the growth in cross regional or continental syndications. As a result, Jack Lang from the LSTA now sits on the LMA board, and Kim Humphreys on the US group's equivalent body.

Many think the next big challenge will be the trading of distressed debt and LCDS. "As the cycle turns we will aim to bring some clarity in the distressed debt trading market. This is challenging because the market is rather opaque and trading practices differ between Europe and the US", said Humphreys. "While there is a lot of interest from our members in the fast growing loan CDS market. As the market is fairly new we don't know where it is going but we are watching very closely."

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