Some of the largest investors in the $1.2 trillion market for risky corporate loans say they're being given too little time to comb through the hundreds of pages of documents that govern the deals, leaving them exposed to potentially dangerous loopholes.
Now many are urging the industry's main trade group to do something about it.
GSO Capital Partners, the credit arm of Blackstone Group Inc., is working with roughly a dozen other buy-side firms as well as underwriters including J.P. Morgan Chase & Co. and Bank of America Corp. to propose new industry standards, according to people with knowledge of the matter.
Money managers often have only a day or two to sift through reams of loan documentation before deciding how much to buy -- a timetable intentionally set up by borrowers seeking the best possible terms. The pushback follows a number of high profile transactions in which private equity sponsors took advantage of weak investor protections to shift assets and cash flow out of reach of creditors, catching them off guard and fueling bitter clashes.
"A 24-hour shot clock is obviously too short of a window to effectively go through these documents," said Bill Housey, a senior portfolio manager at First Trust Advisors who is not involved in the discussions. "If assets or collateral can be stripped from lenders through various loopholes, we want to make sure we are paying very close attention upfront."
Representatives for GSO, Bank of America and J.P. Morgan declined to comment.
The GSO-led group, which was created in June as a subcommittee of the Loan Syndications and Trading Association, is discussing a proposal to update guidance the industry group first issued nearly 15 years ago, according to the people, who asked not to be identified because the talks are private.