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Leveraged loan markets to ditch the faxes

– The $500 billion market for leveraged loans, one of the last to depend on facsimile machines, is turning to computers to save time and money as stock, bond and commodities exchanges have done for years.

More than 4 million faxes with information ranging from quarter-end payments to interest rates were received by loan custodians in 2012. JPMorgan Chase and Citigroup are now sending private electronic messages to eliminate some of that paper, according to data provider Markit Group.

While lending has grown 130 percent since 2008, loan trades still take as long as three weeks to settle, compared with three days for stocks and bonds. Modernizing the largely unregulated market, which has financed companies such as MGM Resorts International and Six Flags Entertainment Corp., would cut costs, reduce manual errors and add transparency.

“I thought the fax lobby was behind the continued use of all those faxes,” Andy Viens, senior vice president, operations at Sankaty Advisors in Boston, said in a telephone interview. The new system “can eliminate some of the re-keying and the cost could go down as part of that automation.”

Bank of New York Mellon’s trustee group handled 650,000 faxes, and processed 376,000 transactions and 26,000 loan trades during the third quarter, Jocelyn Lynch, managing director at BNY Mellon Corporate Trust in Pittsburgh, said in an interview.

Wells Fargo received 348,575 documents in August, September and October, according to the San Francisco-based bank.

JPMorgan, the second largest arranger of U.S. leveraged loans in 2012, and Citigroup, the sixth biggest, started getting rid of all those faxes last year by sending electronic notices to a unit of London-based Markit. The banks are using Financial Products Markup Language, or FpML, to standardize messaging, Lynch said.

Notices of interest payments, trade information and loan holdings may go electronic by the end of the second quarter, Ellen Hefferan, vice president of operations at the Loan Syndications and Trading Association, or LSTA, said in an interview.

Automated clearing might reduce costly settlement delays. An investor who bought into the Cengage Learning Inc. $1.3 billion term loan at 91.125 cents on the dollar Nov. 2 would have had a paper loss of 21 percent while waiting three weeks for the purchase to close, as the price tumbled to 71.75 cents after the textbook publisher reported that quarterly net income dropped 90 percent from a year earlier.

Leveraged loans are rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s Investors Service.

Loans don’t trade publicly and aren’t regulated by a specific government agency.

“Not having automated clearing is one of the things that drags down the loan market,” said Jason Rosiak, head of portfolio management at Newport Beach, Calif.-based Pacific Asset Management, the Pacific Life Insurance Co. affiliate that oversees about $3 billion in assets.

“With a bond you deliver and get payment. Loans settle physically, which is different.”

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