A corner of the debt capital markets known for still sending official notifications via email and even the occasional fax is poised for a modern update.
Bank of America Corp., Citigroup Inc., and JPMorgan Chase & Co. are developing a new platform for the $4 trillion syndicated loan market that would let lenders access data across their portfolio all in one place. Currently, lenders receive a hodgepodge of updates on each individual loan — interest payment notices and requests for amendments, for example. It’s a headache for investors who often have to manually update that data into their own internal systems.
“Our clients are spending too much time chasing each individual agent bank for confirming and reconciliation of what they actually own, and this will really give them the power to do some of that themselves,” Alex Naboicheck, head of U.S. leveraged loan trading at Bank of America, said in an interview.
The loan market is one of the few parts of finance that’s been left out of major technological improvements, even as it swelled in size and attracted scrutiny from regulators. It’s been of particular concern for the $1.2 trillion leveraged loan side, which is used by private equity firms and others to layer heavy amounts of debt on corporate balance sheets to fund buyouts.
Unlike bonds, loans are not a registered security, meaning the specifics of how the debt is structured and the company’s disclosure requirements depend on each loan’s legal documentation and that lack of standardization has made it difficult to centralize data. The new system aims to improve the back-end part of the process — how banks communicate notices to lenders.
Citigroup’s role as an administrative agent came under scrutiny last year after making a $900 million payment to lenders in error, but this new platform would not have prevented that mistake.
Though the new tool isn’t involved in trading, having up-to-date data could eventually lead to improvements in liquidity and notoriously long settlement times — 18.6 days on average in 2020, according to the Loan Syndications and Trading Association, or LSTA.
For syndicated loans — debt sold to a group of lenders — one bank serves as the administrative agent that provides the back-office record-keeping. The new platform would sit on top of the banks’ existing internal software that tracks each loan and put all the up-to-date data in one place, and also allow the investors to communicate with the banks.
“The plumbing is going to be more efficient,” Lee Shaiman, the LSTA’s executive director, said in an interview. “The pipes are going to flow better.”
The new, yet-to-be named platform has been in the works since early 2020. The three banks are aiming to formally launch it in early 2022 and plan to invite their peers to join. The new platform would work for leveraged loans and also revolving credit facilities, bridge loans and term loans lent by banks.
In 2020, Bank of America, Citigroup and JPMorgan served as administrative agent on 74% of all new U.S. corporate investment-grade loans, and about 37% on all new leveraged loans, according to Bloomberg league table data.
The platform is latest in the digitization of the debt capital markets and comes on the heels of a separate partnership between Bank of America and Citi to create a new platform for executing fixed-income trades that is initially focused on the collateralized loan obligation market. Nine of Wall Street’s biggest banks in November launched a new bond-ordering system that could transform the way trillions of dollars of company debt is marketed and sold to investors.
“This draws a parallel with the electronification that has been driven in other product areas,” said Andrew Murray, a director in the market infrastructure and fintech investments team at Citigroup. “This initiative is continuing that theme in the loan space, which is one of the areas where there are more manual challenges compared to other asset classes.”
Making this data centralized and up-to-date could eventually lead to shorter settlement times and could improve liquidity and support growth in an asset class that has been booming in recent years, Jenny Lee, head of leveraged finance capital markets at JPMorgan, said in an interview.
“One of the root causes of long settlement times in the loan market, especially compared to the bond market, is the lack of timely, dynamic and high quality data,” Lee said. “What we believe is needed to kickstart this transformation is really an overhaul of how lenders access their loan data and digitizing the connection between lenders, agents, and other service providers engaged in the processing of the loan.”
— With assistance by Lisa Lee, Davide Scigliuzzo, and Jeannine Amodeo