Secondary market credit trading and out-of-court restructurings have co-existed for many years. The relationship is close, but far from collaborative. Both sides are responsible for this mismatch –
On the one hand, record owners may not be economic owners of the loans and claims due to secondary trading. Record owners may have sold the loans and claims but it takes a longs time to settle that trade and have the buyer become the new record owner. Sometimes the buyer cannot become the record owner and must be content with having beneficial or economic interest, but not title, of the loan or claim.
On the other hand, the success of a restructuring requires achieving and maintaining the broadest support from creditors in a compressed timeframe at the lowest cost to the restructuring company. Prompt and targeted negotiations with true economic owners are a key premise on which successful restructurings are built.
Here are some simple suggestions to restructuring companies that should help harmonize their goals with those of stakeholders participating in an increasingly liquid secondary credit market:
Similarly, here are some suggestions for secondary market traders when trading loans or claims being restructured:
Secondary credit trading and debt restructuring of troubled borrowers are two overlapping and interacting aspects of the life of a loan or claim. When they occur in tandem, secondary trading parties need to adjust their trading activities in the context of restructurings more proactively to deal with the associated risks and challenges. Restructuring professionals need to be mindful of secondary trading markets and practices in their approaches to restructurings in order to achieve maximum success at the lowest cost. Careful examination of contractual provisions and limitations and creative structuring of transactions and processes will help both trading and restructuring co-exist in an orderly fashion.