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.