On the face of it, the future is looking rosy for the commercial loan syndication market. But behind the scenes, you’ll find systems and processes that are firmly stuck in the past. And for fintech providers, it’s a problem that can’t be solved alone.
Business booms – but operations stall
At October’s 2023 Loan Syndication and Trading Association (LSTA) Annual Conference in New York City, the mood was understandably buoyant. Growth in primary syndication may have slowed since its pandemic heyday, but trading volumes keep increasing. Plus,
syndicated loans as a whole have continued to outperform fast-rising interest rates.
So, on the one hand, the commercial loan syndication market is strong, thriving and creating a lot of business and activity across the buy and sell sides of the financial services industry. But on the other, its operations remain highly manual and inefficient.
It takes large teams of people to book syndicated loan facilities with investors and manage the complex distribution of payments. And unlike derivatives, which are now largely quoted for and exchanged electronically, syndicated loans are still typically
traded over the counter.
They also generate a lot of analogue data. In the complex world of commercial loan syndication, contracts can run to hundreds of pages of text on the many facilities and covenants involved – usually housed in relatively inaccessible Word documents or PDFs.
It’s a perfect use case for smart contracts on a blockchain. But with traditional practices so entrenched, that level of automation is a long way off for this market. Staggeringly, in fact, our clients tell us that fax machines are still the primary tools
for sharing data on syndicated loans between agent banks and buy-side funds.
Calling time on manual processes
Something’s got to give – and sooner rather than later. At the LSTA conference, there was a definite feeling that the number and pace of market changes are increasing for commercial loan syndication.
As it continues to weigh up whether syndicated loans count as securities, the U.S. Securities and Exchange Commission (SEC) is considering a raft of regulations it would like to bring to the market.
Then there are other regulatory pressures to factor in, such as LIBOR cessation and ESG.
All of which introduce new economic risks for syndicated lenders; risks that manual processing does nothing to mitigate.
In short, it’s time for the market to go digital on a grand scale. For firms like FIS, that means not only providing our own specialist platforms for commercial loan syndication and servicing but also collaborating with other tech providers.
From separate platforms to a single ecosystem
With so much opportunity for both transformation and growth, we’ve already seen a number of new fintechs enter the loan syndication market to help solve its big operational challenges with innovative technology.
Now, we’re looking to partner with these firms and open up our platform and its data rooms to their transformative capabilities – whether for digitizing every component of loan contracts or unifying and standardizing operational data from banks.
The end goal is a single digital ecosystem for commercial loan syndication. Here, the buy side and the sell side could come together to share documents and interrogate data, which would flow seamlessly in digital code rather than on PDF or paper.
One day, perhaps, syndicated commercial loans will all be created and managed in a blockchain. But in the meantime, fintechs can pool their incredible resources to build an ecosystem that reinvents and adds value back to the market, increases its efficiency
– and maximizes its potential for future growth.