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COVID-19 Legal Resource Guide
March 16, 2020

Bank Debt Investments

  • Par versus Distressed:The vast majority of U.S. bank loans traded in the secondary market settle on either par or distressed forms published by the Loan Syndications and Trading Association (LSTA). The distressed forms offer significantly more protection for buyers of bank debt, including representations, warranties and indemnities specifically designed to guard against certain credible risks (such as equitable subordination or disgorgement) inherent in a restructuring or a bankruptcy proceeding. Credits that have been trading on par documents now may be sufficiently stressed that investors should consider the advantages of settling trades with the protections provided by the distressed forms.

  • At the Time of Trade: In the absence of a “shift date” published by the LSTA, there is no clear guidance as to whether a trade should settle on par or distressed documents. Clearly, bank loans trading below 80% indicate that the market is recognizing financial concerns. Market practice requires that determination of the type of trading documentation be negotiated by the parties “at the time of trade.” Thus, when entering into a new trade, it is critical that loan market participants consider the differences between par and distressed documentation and whether the allocation of risk for a particular credit warrants distressed forms.

  • Shift Date: Upon request, the LSTA will determine the date on which the market convention for transferring a particular borrower’s debt has shifted from par to distressed documentation. The LSTA provides a framework for selecting the shift date, which is designed to promote efficiency in the loan market. In determining the shift date, the LSTA analyzes and reviews trade data provided by dealers and market makers. Loan market participants investing in a new credit should be aware of a shift date, and if no shift date exists, they should consider requesting one from the LSTA.

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