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A warning for loan buyers

Attempts to establish standard terms and codes of practice for the trading of distressed corporate debt have been spurned so far by the London market. Buyers of loans who don't read the fine print can find themselves with unexpected legal obligations. By Christopher Stoakes.

The market in trading distressed corporate debt, a necessity born of the last recession, looks here to stay. But attempts to instil standard market practice have so far failed to establish a consensus. This may not matter now. But the point at which it will ­ the next economic downturn ushering in a wave of corporate defaults ­ will be too late. For those in charge of debt-trading desks, this is the time to make sure that existing documentation and procedures provide adequate protection, especially in a market where the speed of dealing and the thin margin on any particular trade may make it impracticable to obtain legal advice every time.

All loan traders should keep a wary eye on Bank of England pronouncements. The Bank is concerned that a secondary market in corporate debt should not undermine the so-called London Approach. The London Approach is a set of principles, overseen by the Bank, which encourage lenders to a company in difficulty to work together to continue to support it. The secondary market moves some corporate debt to banks that have no direct relationship with the borrower. The more international the market, the less beholden some participants may feel to the Bank.

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