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  5. The Debt Exchange: Bringing Liquidity to Secondary Loan Trading

The Debt Exchange: Bringing Liquidity to Secondary Loan Trading

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2002/11/19

Abstract

The economy’s current state and recent corporate woes have encouraged increasingly risk-averse banks to explore new ways to prevent portfolio deterioration and financial loss. The answer for many lenders has been careful portfolio management through the sale of under-performing and non-performing loans in the secondary loan market. While still immature, the secondary loan trading market has experienced a 31% compound annual growth rate over the last 10 years. Celent expects trading volumes in this market to exceed $200 billion by the end of 2005.

Trading platforms, such as that hosted by The Debt Exchange (DebtX), have emerged, thereby increasing liquidity. These exchanges are focused primarily on the needs of the buy-side. Using these platforms, institutions can conduct full due diligence, make more educated bids, and participate in trading transactions. Sellers benefit from greater reach and faster closings than can be achieved offline.

"As with other new technologies, uptake has been slow, but conducting loan sales online is likely to become an important portfolio management tool going forward, as well as a way to reach desired levels of liquidity within the marketplace," said Christine Barry, wholesale banking analyst at Celent and author of the report.

"Today less than 2% of US secondary loan trading is conducted online, but these platforms have great potential and using them is the market’s logical next step," said Barry.

This report analyzes the secondary loan trading market and presents a case study on DebtX’s success in increasing liquidity in the marketplace. It describes the platform’s capabilities as well as how financial institutions are using it today and how they will use it in the future. Finally, it presents the benefits of online trading and compares the buy-side experience in the offline world to the DebtX experience. The DebtX platform is a good example of how the Internet can be used to advance the secondary loan trading market toward maturity.

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