Loan trade settlement platform provider, Ipreo, and smart security platform, Symbiont, announced last week that they are creating a new company to overhaul “antiquated and costly manual processing,” in the global syndicated loans market.
"This business will benefit the entire syndicated loan market, from issuers through investors and regulators. Not only will it help the sell-side save tens of millions in capital costs, but loan portfolio managers will no longer have to endure the drag on yield caused by large cash buckets and costly credit lines."
- Joe Salerno, Ipreo Head of Loan Trade Settlement
Syndicated loans are provided by a group of lenders, and typically arranged, and administered by commercial or investment banks, known as lead arrangers. One important aspect of syndicated loans is that they are structured for the specific, customized needs of companies, which is one main reason why they are very popular, according to the leading advocate for the U.S. syndicated loan market, The Loan Syndications and Trading Association (LSTA). In addition, “syndicated loans are attractive for investors because they combine a number of risk-mitigating factors with high income,” LSTA explains.
According to the latest independent report by Thomson Reuters, Global Syndicated Loan Review, the market reached $4.7 trillion in 2015. Loans to borrowers in the US accounted for 56% while loans by U.S. borrowers represents 49% of global volume in 2015.
While syndicated loans are lucrative for financial institutions, and popular for investors, they are not without problems. One major improvement is shortening settlement times, which the LSTA’s Board of Directors has put at the very top of its agenda. Since long settlement times increase liquidity risk, financial institutions are forced to developed other techniques “to effectively manage the liquidity of their portfolios,” LSTA states.
A recent industry report by Accenture compares settlement times of different asset classes, finding that syndicated loans take approximately 20 days to settle, which is much longer than other asset classes traded on an exchange or cleared through a clearinghouse.
The idea of a blockchain-based “smart loan” is not a new one. Smart contracts are an idea originally defined by cryptographer and Bitcoin developer Nick Szabo in 1994, and could introduce new functionality to loan products such as scheduled debiting, automatic collection, or even conditional term adjustments.
Interfaced with new devices for the Internet of Things, called “smart property,” smart loans could even be used to send a signal to their attached property under certain circumstances which render it useless or even recall it. A classic example for this is to have a “smart car” that constantly watches the blockchain for its smart loan to be paid on time, and if it isn’t, the car won’t start, or eventually it would simply drive itself back to the dealership. “We can create a smart lien protocol: if the owner fails to make payments, the smart contract invokes the lien protocol, which returns control of the car keys to the bank,” stated Szabo in his 1997 papers on Smart Contracts.
In an independent report, BBVA Research described loans as a potential use case of smart contracts, but cited that standardization and wider adoption of the blockchain is needed to turn any smart contract use cases into reality.
“Loans could be stored as smart contracts in the blockchain, together with the collateral ownership information. If the borrower misses a payment, the smart contract could automatically revoke the digital keys that grant his access to the collateral.”
- BBVA Research
Accenture went on to state that blockchain use is most valuable when “there is no well-established authority in place.” The company cites syndicated loans, fixed-income, currency and commodity (FICC) derivatives, private equity, and bilateral over-the-counter transactions as examples.
Taking advantage of the lack of a central authority for syndicated loan, the New York-based Ipreo is taking the first step in bringing smart loans to market by collaborating with blockchain startup Symbiont.
Founded in 2006, Ipreo is a leading global provider of financial services technology, data and analytics to all participants in the global capital markets, including sell-side banks, publicly traded companies, and buy-side institutions. With more than 900 employees and clients in every major financial hub around the world, the firm claims that the top ten bank arrangers use its existing syndicated loan platform while the top 20 tier-one investment banks are clients of the firm.
In August 2014, Ipreo announced the completion of its acquisition by private equity funds managed by Blackstone and by the Goldman Sachs Merchant Banking Division from affiliates of Kohlberg Kravis Roberts & Co. L.P.
“Settlement periods of 20 business days or more threaten the continued growth of the loan market. For the sell-side, the delays tie up precious capital. For the buy-side, settlement uncertainty confounds cash management and necessitates costly credit lines.”
In response to the industry’s need for shorter settlement time for syndicated loans, Ipreo launched a system called LTS, designed to reduce loan trade settlement times to just three days (T+3) from a weeks-long settlement process in September 2015. The system includes online tools and support services for administrative agent banks that will “improve secondary liquidity for the loan industry, which has endured unnecessarily slow settlement times for many years,” the Senior Managing Director at Blackstone, Martin Brand, stated at the time of the announcement.
Using Ipreo's new loan trade settlement platform, global investment servicing firm, Cortland Capital Market Services, became the first agency services provider to offer T+3 loan trade settlement to their customers.
“We are proud to offer an innovative new mechanism to improve settlement in this important capital market. When we entered the syndicated loans market a few years ago through the acquisition of Debtdomain, we were surprised to see that loan trades still took weeks to settle. So we set an aggressive goal of T+3, and our team delivered.”
- Scott Ganeles, Ipreo CEO
For the new company, Ipreo is contributing its LTS system while Symbiont will contribute their blockchain expertise and development of ‘SmartLoans,’ the first smart contracts for the loan market.
"We are delighted to be working with Symbiont to create an industry-wide solution to the loan settlement problem," added Kevin Marcus, Ipreo President and COO: "With LTS, we addressed the legal and process problems that have plagued loan trade settlement. Our joint venture with Symbiont marries this solution with the transformative power of blockchain technology."
Since 2015, Symbiont has been developing a platform that allows users to efficiently issue, manage, locate, and trade smart securities, which are self-executing digital contracts that are stored on a blockchain. The company has raised $7 million in venture capital from Duncan Niederauer, the former chief executive of the New York Stock Exchange, and others. The company recently partnered with international digital security company Gemalto to secure their Blockchain-based transactions.
"There's a lot of talk about blockchain but little evidence yet of digital transformation on the front lines, so it's great to lead the way. Ipreo is a perfect partner. Unlike some of the more vocal blockchain start-ups, it has an established track record and already plays a vital role in the smooth operation of the loan markets."
- Mark Smith, Symbiont CEO and co-founder
The new company, yet to be named, will integrate Ipreo's LTS and Symbiont's smart contracts to deliver fully-automated settlement and maintenance system. Ipreo loan trade settlement head Joe Salerno will lead the new company with Symbiont co-founder Robby Dermody as COO. The new system will generate “tens of millions of dollars in potential annual savings,” the press release states.
“Our goal is to combine forces on the technology and produce a blockchain-backed syndicated loan and trading platform,” added Robby Dermody, co-founder of Symbiont.
A potential competitor to Symbiont, the Ethereum project is shaping up to be a potential hotbed of blockchain lending applications and services, due to its natural ability to run smart contracts directly on its blockchain. Although the platform is still unfinished, Bitcoin personal loan lender BitBond recently told Lending Times that they are looking into the idea of using Ethereum’s smart contracts as a more efficient, faster, and more scalable way to structure their loan products.
Meanwhile, one of Japan's largest financial institution, Mizuho Financial Group, recently announced that they are experimenting with using Microsoft’s Azure BaaS for their syndicated loan business in collaboration with Information Services International-Dentsu (ISID) and CurrencyPort. It has yet to be seen what advantages this particular deployment will offer Mizuho’s offering, but it is an experiment sure to be watched closely by the rest of the industry. The company has been the leader in syndicated loan arrangements in Japan for seven consecutive years, with amounts totalling ¥9 trillion in 489 deals last year. It is also unknown, albeit likely, whether or not Mizuho will be using Ethereum for this product. The smart contract platform is easily accessible to them through the Azure BaaS, where they have tested it twice already through R3 CEV.
“Firms that want to assess the viability of blockchain technology for specific financial instruments, such as syndicated loans, should consider a number of factors, such as anticipated reduction in settlement days, current clearing and settlement costs, digitization potential, product volume, cost of capital avoided and implementation costs.”