There’s a growing trend on Wall Street and it could end up hurting people’s feelings.
Increasingly more leveraged loan buyers are “blacklisting” investors they don’t like and preventing them from investing in their loans, Bloomberg reported.
Understand this is perfectly legal.
And it’s not just the little guys who are making the blacklist. Hedge fund giants Fortress Investment Group, Highland Capital Management, and Cerberus Capital were all blocked from investing in RBS Holding Company’s $US155 million Quadriga Art loan last year.
The $US800 billion loan market (which has no regulator) is the only one in the U.S. where blacklisting is possible, Bloomberg reported. In stock and bond markets, anyone who can afford to buy shares in a publicly-traded company can do so, but in the loan market, lenders can ban investors for as long as the loan lasts.
Companies tend to blacklist investors if they are known to be tough on debt restructuring, if they are affiliated with a competitor, or, simply, if the company doesn’t like them.
Many of them have free reign to do so because the SEC can only regulate securities, and not all loans match that definition.
The phenomenon dates backs to the 1990s when Nextel Communication Inc.’s Steve Shindler penalised investors who weren’t interested in their credit by blocking them from buying debt in the secondary market. That later became known, tackily, as “Shindler’s List.”
You can’t sit with us
Today blacklisting is much more widespread. Some 77 per cent of loans made last quarter allowed borrowers to block specific investors, while last year, the number was only 51 per cent, Bloomberg reported.
Earlier this year the Goldman Sachs-controlled Interline Brands Inc. blacklisted hedge funds Bulldog Investors and QVT Financial.
But blacklisting can be a problem because it cuts down on potential buyers, meaning the loans can become difficult to trade.
It’s inconsistent — especially when based on personal animosity — and fundamentally uncompetitive. It could exclude good investors who might be better situated in the case of a default, Bloomberg reported.
Also, it’s just a bit mean.
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