Key Innovations Solving Pain Points in the Syndicated Loan Market
Over the past decade, technology has transformed the banking sector almost beyond recognition. New tools and the effective use of data, AI and machine learning, has led to huge efficiency savings and ushered in new and better ways of doing business.
However, some areas of the industry have enjoyed disproportionate benefits whilst others are still playing ‘catch-up’. Despite being a significant market (around $4.5 trillion per annum), syndicated lending has been slow to adopt new technologies, particularly within front-office distribution teams.
Loan syndication is complex. It relies on decentralised management systems and data sources and generally uses inefficient processes and tools which makes for a frustrating arrangement. As such, the most significant opportunity to transform the sector has been (and still is) to improve and enhance the experience of front office teams by providing them with more effective technologies to manage distribution activities and better access to actionable data. There are a few key areas where these changes are catalysing significant improvements.
Digitising the Front Office Workflows
Current front-office workflows involve a several manual processes, and data entry into multiple systems with the involvement of various stakeholders to make decisions throughout syndication workflows, from origination to close of a deal. Several of these steps are well suited for automation as they use repeatable rules and known data sources with fixed formats. However, syndicate desks typically spend significant time in the early stages of a deal, exploring with potential lenders to ensure they are relevant and appropriate. Only then can the distribution activities start in earnest.
By automating key workflows, distribution activities can be optimised and accelerated, and the entire syndication process is made more efficient and less prone to error. Even in areas where full automation may not be appropriate, providing better access to data, equips front-office teams with more effective decision-making tools which would render equally advantageous results.
Adopting a Platform Approach
Effective loan syndication depends on cooperation between internal teams, as well as clear communication with agent banks and lenders. Even within the same bank, the progression of a deal from one team to another (e.g. Origination to Distribution), is often disjointed, and the flow of information is disrupted by poor or no integration capabilities between systems.
Similarly, the ways in which banks share key deal information with stakeholders, typically sit outside of any existing management system and are often insecure. A clear example of this is the widespread practise of sharing sensitive financial information using a separate data-room system, separate from the loan management tool, or even via email. By adopting a platform approach to deal management and syndication, banks can rid themselves of ineffective communication and outdated information-sharing practices, and can contain the entire, end-to-end deal cycle in one, centralised platform. This is a transformative approach as it gives all participants access to the same, real-time information, ties deal workflows together in one environment and maximises data security without any information needing to leave the platform.
Expand Beyond Your Network and Transact on a Neutral Exchange
The loan market suffers as a result of not having a neutral, decentralised data-driven exchange for the syndication of loans. This renders syndication markets highly inefficient and means that dependable, real-time data can be difficult to access. By building a centralised exchange, it would allow for the execution of loan syndication on a more open basis, and crucially, this exchange would not be limited to a bank’s immediate network.
When it comes to the effective syndication and exchange of loans, a common challenge is the sharing of sensitive information between banks and lenders. Banks and other financial institutions are reluctant to share deal information on an open marketplace due to concerns around security. As such, they are left with little choice but to operate only within their immediate networks, else risk being slow to close deals.
Technology can help solve this problem by providing private, ring-fenced environments which allow banks to manage their own data internally, whilst selecting and sharing only the most important information with external stakeholders. With this approach, banks also have the ability to set access permissions and information sharing rules and limitations on their deals, for all participants. This marketplace will optimise deal outcomes, drive efficiencies for the arranging banks and utlimately, reduce the cost of borrowing for companies.
Innovation in loan syndication will be key in revolutionising the industry and bringing the sector up to speed with other technological developments across banking and capital markets. As with any new banking technology, the ability to enhance or change current processes and systems is one of the biggest challenges to adoption. For those that have been proactive in adapting to these changes, the data shows that the benefits are significant, and continue to scale with new business.
Find out more about HUBX at hubx.capital