“We protect the rights of our investors,” Jim Dondero, president of Highland, said in an e-mailed statement. “Sometimes we must pursue the ‘bad acts’ of management teams or sponsors. It stuns us that some managers are passive and never protect their investors.”
Mark Schulhof, chief executive officer of RBS, declined to comment. Gordon Runte, a spokesman for Fortress, and Peter Duda, a spokesman for Cerberus at Weber Shandwick, declined to comment.
Illiquid Assets
The lack of liquidity in speculative-grade debt has drawn warnings from regulators, including the Financial Stability Board and the U.S. Securities and Exchange Commission, as individual investors poured money into mutual funds and exchange-traded funds. The concern is that it’s become too easy to get into a market for people who don’t understand how tough it may be to cash out when sentiment sours.
Trading is slow even in a bull market.
It took 20 days on average to complete a loan trade in the three months ending in June, according to data compiled by the New York-based Loan Syndications & Trading Association. That’s almost seven times as long as the three-day average in the corporate bond market.
Yet for all of the concern expressed by U.S. policy makers, none of them oversee the loan market. Its unregulated status traces back to securities laws that were drafted in the 1930s, when company loans were mainly private transactions between one bank and one borrower. These days, though, the debt is mostly sliced into pieces worth several million dollars and distributed to investors.
The SEC’s authority in this market is limited to loans that meet the legal definition of a security, which requires a case- by-case review, according to John Nester, an SEC spokesman. “The SEC is focused on the oversight of liquidity management in mutual funds and ETFs, and will continue to vigorously pursue violations of the securities laws within its jurisdiction,” Nester said in an e-mailed statement.
Bad Blood
Blacklisting is rampant. And growing.