Syndicated Lending (Loan Markets): Trends in Loan Markets
The first thing to note is that the Loan Markets are booming. Partly because of relatively benign corporate conditions across the planet over the last few years; partly because of high levels of mergers and acquisitions and partly because of new players in the loan markets looking for better returns on their money in these times of low global interest rates. The second thing to note is the strange fact that Syndicated lending, which is one of the oldest areas of investment banking activity is still so far from being a perfect market (See What are Loan Markets Like). This is particularly odd given the comparison with new instruments like SWAPS and derivatives which are a lot newer but have much more “perfect” markets.
Nonetheless the overarching trend in the loan markets is one of slow progress towards a more perfect market.
- The number and diversity of investors wanting to play in the loan markets is increasing. Recent joiners are investment and hedge funds who want to add the loan asset class to their investment mix. Also investment clubs of private investors are also starting to participate. As a result the number of secondary market deals per primary loan is increasing, particularly in the UK and Europe which are behind the USA in this respect.
- This is putting pressure on a number of the current characteristics of the secondary loan market. The new players want smaller secondary deal sizes with correspondingly smaller transaction costs (e.g. a Fund manager may want to put bits of a loan participation into 20 or 30 of his individual funds. From a syndicated loan agent’s point of view, this represents 20 or 30 syndicate members as each fund is the legal owner/lender not the fund manager.)
- To facilitate liquidity of loans the markets want to introduce some standards in particular a naming convention akin to the bond markets’ CUSIP for those loans that have an external credit rating (e.g. S&P or Moody’s)
- Also to facilitate liquidity and start to attract different types of investors some banks are bundling up participations into companies called CLO’s. These companies only have loan participations as their assets and they issue bonds or equities against these assets which can be traded in the more liquid and flexible bond and equity markets. This is much the same as mortgage backed securitisation is for converting personal home loans into tradeable instruments.
Many banks are looking to invest in the IT support for their syndicated Loan activities, due to:
- overall growth in syndicated lending
- compounded by the greater work per deal for back offices caused by the higher volume of secondary market deals.
- sophisticated “calculation” capabilities to correctly work out members proportions of interest etc. in an environment where the syndicate membership is constantly changing
- automated payments interfaces between loan/agency banking systems and payments mechanisms such as CHAPS, CHIPS and SWIFT
- automated fax interfaces for loan/agency banking systems
- greater image and document management capabilities
- automated interfaces between secondary markets dealers and loan/agency booking systems
Without these investments the currently heavily manual processes will prove untenable in terms of staff volumes and operational/fraud risk in the future.
More from the Syndicated Lending (Loan Markets) report: