Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-09-28
2004-02-10
Cuff, Michael (Department: 3627)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S026640
Reexamination Certificate
active
06691094
ABSTRACT:
BACKGROUND OF THE INVENTION
The present invention relates to a loan trading system and corresponding method and, more particularly, to a loan trading system carried out over the Internet to match buyers and sellers of loans via the matching of bids and offers or through the conducting of auctions.
Bank Loan Facilities
Large corporations and trusts arrange bank loans in facilities provided by a group of banks and financial institutions, otherwise known as a syndicate. Bank loans typically consist of term loans and revolving credit facilities (also known as revolvers). Term loans are lent to the borrower and have a stated maturity date for repayment. In addition, term loans may be structured with an amortization schedule providing different maturity dates for partial amounts of the term loan with the final payment due on the final maturity date. Term loans may be prepaid but not re-borrowed under the same facility.
There may be more than one type or tranche of term loan under the same facility. These term loans are typically differentiated by the maturity date of the tranche. For example, the term loan with the shortest maturity date, typically referred to as the Term Loan A, may require a single amortization or have an amortization schedule with the last payment due on the final maturity date. A longer dated term loan or series of term loans under the same facility may have a maturity date longer than the Term Loan A. For example, a bank loan facility may have a Term Loan A tranche, a Term Loan B tranche with a final maturity date longer than the Term Loan A tranche, and a Term Loan C tranche, with a final maturity date longer than both the Term Loan A and Term Loan B tranches.
A revolver provides a commitment from the syndicate for the borrower to draw upon a set amount of money until the maturity date. The commitment is then composed of two portions, the drawn amount and the undrawn amount. The borrower may draw upon the revolver, increasing the drawn amount and reducing the undrawn amount. Part or all of the drawn amount may also be repaid, thereby increasing the availability under the commitment. Draws and repayments may take place continuously until the maturity date when all outstanding amounts are due. There is no requirement that any draw be followed sequentially by a repayment.
In some revolving credit facilities, draws may be predicated upon the satisfaction of certain requirements that limit the availability of money to an amount less than the total revolver commitment. These requirements, generally in the form of financial calculations, will generate a maximum available amount that the borrower can draw upon. This restricted amount of funds is typically referred to as the borrowing base.
Typically, bank loans have floating interest rates. Borrowed amounts are drawn for intervals which have base interest rates set by industry or bank standards plus an interest rate spread charged to the borrower. For example, funds may be drawn for a number of days, weeks or months. The most common form of base interest rate is the London Interbank Offered Rate or LIBOR. For example, a borrower would inform the bank group of its desire to borrow funds under 1 month LIBOR. The interest rate would then be set for the 1 month interval at the then current 1 month LIBOR interest rate plus the interest rate spread that is set under the facility. At the end of the 1 month period, the money may be repaid or reborrowed for another period, whether or not the period would be the same or different length. In this way, the interest rate is said to float as it is resets periodically.
There are generally two types of lenders in bank loan facilities. Banks typically provide loans under the revolver and term loan A tranches. Institutional investors such as mutual funds, privately-raised funds, investment companies or insurance companies typically provide loans under the term loans with longer maturity dates than the term loan A tranche. These term loans, such as the term loan B and the term loan C in the previous example, are typically referred to as institutional term loans. The combination of the term loan A and revolver tranches are typically referred to as the pro rata tranches.
To date, the institutional term loans typically have a higher interest rate spread than the pro rata tranches. Other than the differences in the maturity dates and amortization schedules, the lenders under the different tranches typically have the same legal rights under the bank loan facility.
Bank Loan Trading
An active market has developed for the trading of bank loans. As a private instrument, the trading of bank loans is not subject to the laws pertaining to the trading of public securities. Bank loan trades are conducted by the assignment of the bank loan from one lender to another. Bank loan trades may be arranged through the negotiation of individual parties, with the assistance of brokers, or through an auction. There is no regulation on how these trades are conducted, but assignments typically require the approval of the administrative agent and the borrower. An administrative agent provides the processing of paperwork and movement of funds associated with a bank loan on behalf of the syndicate and the borrower. The approvals typically require that they not be unreasonably withheld.
There are generally two restrictions on the assignment of bank loans, compliance with a minimum assignment amount and a minimum retained amount. The minimum assignment amount sets a floor for the amount to be traded and the minimum retained amount pertains to the amount the assignor or seller of the bank loan will continue to hold after assignment of a partial amount of their commitment. The seller may assign its total commitment, but it may not retain a commitment below the minimum retained amount.
The participants in the bank loan market include the aforementioned banks and institutions, as well as dealers who make markets in or act as brokers for bank loans. Therefore, there are two types of trades in bank loans: principal and brokered. Principal trades pertain to transactions where a dealer will buy the loan with its own capital and hold the position in inventory until resale. Brokered trades are those that the dealer has arranged for both the purchase of the bank loan from a seller and sale of the bank loan to a buyer. Therefore, the dealer does not risk its own capital on the two transactions.
Each trade or assignment generally requires the payment of an assignment fee to the administrative agent of a bank loan facility. Typically, the parties split these fees. In the case of a brokered trade, the dealer will typically pay half the fee for the purchase from the seller and half the fee for the sale to the buyer. Note that a dealer is not required to conduct a trade in such a manner to avoid the buyer and seller learning each others' identity. Therefore, a buyer and seller may conduct a single trade to effect the assignment and split the fee amongst themselves.
How the Market Functions
The loan trading market is considered an over-the-counter market. This means that there is no exchange through which bids and offers are quoted and matched bids and offers are processed. For purposes of this discussion, trading is broken down into two types: trades through interdealer brokers and all other trades.
Interdealer brokers match trades between dealers only. The interdealer brokers will market bids and offers, also known as offerings, to the dealers without disclosing the name of the potential buyers and sellers until a bid and offer is matched. The interdealer brokers will market the offerings to dealers either through telephone contact or through the posting of offerings on terminals connected via a direct telephone line to the interdealer broker's computer system. The interdealer broker systems do not use the Internet for transmission.
These interdealer broker systems provide limited information that includes only the name of the borrower, the tranche offered or bid, the amount of the bids and offers and the price at which t
Cuff Michael
Jaketic Bryan
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