Loan Settlement Delays and T+ Conventions

A stock trade settles in one or two business days (T+1 or T+2), and a bond trade typically settles similarly. A leveraged loan trade is different: because loans are transferred by an assignment process that requires the borrower's or agent's consent and paperwork rather than a simple electronic transfer, settlement can take anywhere from a week to over a month after the trade is agreed — a delay the loan market has formalized rather than eliminated.

Because of that lag, the loan market uses T+ conventions and a delayed compensation mechanism: if a trade doesn't settle within an agreed number of business days (historically around 7 for par trades, longer for distressed ones), the seller compensates the buyer for the economic cost of the delay — mainly the interest income the buyer would have earned on the loan had it settled on time.

Worked example. A buyer agrees to purchase $10 million of a loan on day 1, at a price implying an 8% running yield. Settlement doesn't actually happen until day 21, twenty days late. Under standard LSTA delayed-compensation conventions, the seller owes the buyer roughly twenty days of interest at that yield on the $10 million notional — approximately $10,000,000 × 8% × (20/360) ≈ $44,000 — compensating the buyer for the interest income lost to the settlement delay, on top of the agreed trade price.

This structural lag is one reason leveraged-loan funds hold more cash or use credit lines to bridge redemptions: a fund that needs cash today cannot always count on a loan sale settling before the money is actually needed.