In today’s dynamic financial landscape, the private credit market has experienced remarkable growth and continued expansion is expected. As traditional bank lending channels face challenges, private credit has emerged as a vital alternative for borrowers, offering investors an alternative to broadly syndicated loans (BSLs) and leaving banks out of the equation. However, continued rapid expansion brings concern around the deficiencies in BSL operations and administration, highlighting the urgent need for a modernised loan data management system.
The inherent complexities in the syndicated loan market have brought about significant challenges for users trying to access information. More questions surround how the information is processed and distributed to lenders, agents, trustees and administrators.
This challenge is even greater in the private credit space, where there is less information and a lack of standardisation. However, by embracing digital capabilities and streamlining workflows, industry participants can effectively navigate the complexities of the private credit market.
Private credit is witnessing exponential growth
Since 2008, private credit (also referred to as private debt) has gained popularity; in 2022, it replaced the BSL market as the preferred choice of financing for merger and acquisition transactions. Private credit, like BSLs, is extended to borrowers in the form of floating-rate loans, providing even greater benefits to investors as interest rates rise.
The high capital requirements for banks, and hesitancy to lend to non-investment grade borrowers, provide opportunity for private credit lenders. As highlighted by PwC, non-bank lending now exceeds bank lending in advanced economies.
Private credit lending provides several advantages to the BSL market, including a certainty of funding for the borrower, a smaller group of lenders and less dissemination of information.
It also provides more expertise and knowledge of the sector for lenders and helps to avoid falling recovery rates as documentation becomes tighter. In addition, it better aligns lenders with the capital structure, avoiding lender on lender disputes.
According to US risk assessment firm Moody’s, the US $1.3 trillion-dollar private credit market, which has more than $350 billion in dry powder, will exceed $2 trillion by 2027.
This will be driven by the increase in investor demand for the asset class. A 2023 survey by BlackRock Alternatives indicates that more than half of respondents plan to add to their private credit holdings.
Settlement in the BSL markets continues to be a challenge as settlement times continue to be compressed. Wall Street banks have an increasing appetite to trade private credit loans — an asset class that’s traditionally ‘buy and hold’.
We can only expect settlement times to get worse in a market that has less transparency and automation than many.
Why loan data management technology is essential to the private credit market
The lack of transparency around agent data is a challenge for the entire loan market, but it is especially problematic in the private credit space. Bespoke credit agreements, lack of technology and an overreliance on email and people power make scaling operations in private credit near impossible.
The current surge in the private credit market has illuminated the pressing issues faced by both the BSL and private credit markets. New technology solutions are emerging to fill the void.
In a recent AccessFintech loan working group meeting, comprising 19 institutions across the loan industry, members expressed concern over the operational inefficiencies in the market and what they expect will get worse.
Many pointed to the lack of standardisation of information, an issue for BSL that’s not going to change any time soon and which is only amplified when applied to private credit. Participants agreed that “better technology infrastructure was a desired outcome”.
New technology solutions need to tackle various challenges. Significant email traffic is involved in the process of distributing, requesting and confirming data, which can lead to inefficiencies and delays. In addition, an absence of data reconciliation often results in discrepancies between parties, leading to additional work and complications.
Some of the issues the market struggles with include:
- Reconciling with outsourced third-party agents: This is especially challenging for the buy-side when dealing with multiple agents. It creates a lack of standardisation that leads to difficulty in normalising data and keeping accurate position data.
- Information workflow: Efficient information workflow is crucial for streamlined loan administration. However, obstacles arise due to the manual nature of loan set up, amendment processes and lifecycle event distribution. Communication of information predominantly relies on manual workflows and non-standard communication methods like email, fax and PDFs which can further impede efficient processes.
- Infrequent confirmation of positions and other information: Typically, a lender will only know their position by looking at a notice they receive (via fax or email) once a quarter. This means they’re not always clear if they’re in ‘lock step’ with the agent, something which is especially troublesome if secondary trading picks up for private credit.
- Obtaining lifecycle event information: Accurate information is essential for effective loan data management. However, the manual nature of loan servicing and the lack of standard processing pose challenges. Automating data collection for underlying credits, including amendments, is crucial but currently lacking in the market.
