According to the Loan Syndication and Trading Association, a group that facilitates trading of bank debt, the number of bank debt trading grew 1,200 percent between 1990 and 1999. In a bank debt trade, the seller might be a bank seeking to get rid of a bad loan--known as original assignment, or it might be two parties trading a bank debt previously assigned by the original lender--also known as secondary assignment. In certain instances, credit agreements require that the assignments be in minimum amounts of $5 million or $10 million.
Contract with a distressed debt market broker to help you find a suitable debt for sale. Enter into an oral agreement with the party you are buying the debt from. Many times other banks and financial institutions act as brokers for each other.
Create a written trade confirmation with the bank. The trade confirmation is a standard transaction document in the distressed debt market. It is published by the Loan Syndication and Trading Association. It describes the terms of the transaction such as the trade date, nominal amount of the assignment, purchase rate in percentage amounts, the settlement date, the form of the purchase and sale agreement among other terms an conditions. The advantage of using this document is that it will also include all the standard terms and conditions from the Loan Syndication and Trading Association.
Draft the purchase and sale agreement. The trade confirmation will clarify who drafts the purchase and sale agreement--the buyer or seller. The Loan Syndication and Trading Association has published four versions of the standard purchase and sale agreement. The versions correspond to whether the assignment is original or secondary, and whether the original borrower is in bankruptcy.
Execute an assignment and acceptance agreement. Also known as an "A and A," this document is executed by the assignor and the assignee, and the agent for the bank group that originally made the loan. Most credit agreements provide the A and A as an exhibit, and parties should not deviate much from this document. The A and A states that the seller is assigning to the buyer the bank debt in accordance to the terms of the credit agreement and that the parties approve such agreement. According to the website Hedge Fund News, the A and A is the most important part of the transaction because until the agent executes the agreement, the transaction cannot be consummated.
Create the purchase price letter. Also known as a "PPL," this document sets forth the net purchase price of the transaction and explains how the price is being calculated.
Submit a proposed trade. After the parties have agreed on the purchase and sale agreement, the A and A, and the PPL, it is time to submit the proposed trade to the bank agent to approve. You will submit the trade through the bank. This is usually a straightforward process since most bank agents are familiar with the secondary loan market. However, approval may hinge on your creditworthiness if you aren't currently holding any other pieces of debt from the bank. To avoid the setback of potential delays, submit a draft of the A and A to the agent as early as possible to let her know about the pending trade.
Since settling a bank debt can be an intricate exercise, retain counsel familiar with guiding buyers and sellers through the small world of practitioners who specialize in this type of work.