Bank of America moves to protect investors in trading restriction votes

By Peter Heap

New York, July 31 - Bank of America is introducing new documentation in a move to protect investors from changes in their ability to trade loans - and hopes to improve liquidity in the bank loan market by doing so.

The new voting procedures, which will be included in the bank's standard documentation for syndicated loans, are intended to prevent investors in one class of a loan being "railroaded" by lenders in other classes - who may have different interests.

"This change in assignment language will further safeguard that all lender constituencies are fairly represented in votes that change features affecting liquidity," said Lucine Kirchhoff, head of Syndicated Finance Research at Bank of America.

Under the current standard voting method, all classes of a loan are treated as one, with an overall majority of lenders required to approve restrictions on assignments.

Bank of America's new provisions apply majority voting to each class individually and then require all classes to approve restrictions.

As an example, Kirchhoff cited a facility with a $750 million pro rata tranche and a $250 million institutional tranche. Under the present voting system, the pro rata lenders alone could reach the 51% required to impose restrictions, outweighing the institutional investors. But Bank of America's new procedure will require the support of a majority of both tranches, protecting the interests of holders of the smaller piece.

Kirchhoff told Prospect News that the current language is a "relic from former times" when the bank loan market drew on a different base of lenders.

"This has probably lagged the true reflection, if you look in the mirror, of what is the face of the lending community," she explained.

The old standard, Kirchhoff added, "was less focused on the different classes that might have different interests."

Bank of America decided to make the change based on feedback from its conversations with institutional investors.

"Institutional investors have really driven the growth of the secondary loan market," Kirchhoff said.

"We think that's good. We want to foster liquidity. This helps us ensure liquidity is not going to be negatively impacted by any weird situations."

While Bank of America is making the change unilaterally, as a leader in syndicated loans it has confidence others will follow.

"We think our institutional investors are going to see this and they are going to know this makes sense" and ask other banks to include similar provisions in their deals, Kirchhoff said. "I think this is a leadership move where eventually this will become the norm."

"Our firm is committed to loan trading, transparency and fostering an appropriate balance between issuer and investor needs," added Bill Hodges, Bank of America's head of Global Debt Capital Raising, in a statement. "We believe that transferability of loans is a crucial component for the market."

Bank of America also said it will continue to work with the Loan Syndications and Trading Association as it reviews its standard assignment language and amendment procedures.

Although Bank of America declined to comment when Prospect News raised the case of XO Communications, the recent imposition of trading restrictions on that company's loans riled many institutional investors and bank loan traders. The maneuver came as the company filed for Chapter 11 and was also the subject of increased interest from Carl Icahn - who subsequently launched a public tender offer for its bank debt.

At the time one trader told Prospect News: "The amendment was completed by just the lead banks. They had enough to get 51% of the lender approval needed to pass the amendment and they did it without any of the other lenders knowing. They're probably doing it to block Icahn. Lawyers are looking into this because it seems unfair."

And a fund manager commented: "Most institutional lenders and trading desks are annoyed."

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