The alternative asset market is evolving. Interest in syndicated loans and related products has grown on an exponential level in the last two years, with a large number of refinancing alongside new issuances. In our latest Corporate Trust Expert Conversation, our panel of experts discussed a wide range of topics, picking up on a previous series on transparency and client demands for data and the use cases for LoanArcSM, BNY Mellon’s secure, web-based loan reporting solution.
In this first of two parts, we spoke about broad industry trends in the global loans arena and the regional differences that affect client needs. As investors around the world increasingly look to alternative investments, including private debt and loans, more understanding is needed on the key trends within and between regions. [See BNY Mellon’s latest research on these global growth trends.]
What regional factors need to be better known as allocations to alternatives continue to increase?
Maeve O'Brien, LATAM/Canada Cross Border Business Manager: Within Latin America, you see more lending on a discrete basis rather than in portfolios, usually by major U.S. banks and European financial institutions. Many of these loans are bilateral with companies that are engaged in export activity throughout Europe and the U.S. BNY Mellon plays a role in those cross-border transactions by paying accounts, bankrolling activities, and providing reporting on those exports.
In Canada, much of the lending is in the public-private partnership space, such as large infrastructure projects in transportation and energy. BNY Mellon plays multiple roles with lenders in that space, who also require reporting in terms of the project targets and deadlines.
Kenneth Cheong, Managing Director, Asia Pacific: In APAC, we are seeing more interest in the loan space, especially from the fund side. But we do not yet have much of a secondary market, since investors tend to adopt a take-and-hold approach for loan assets and Asian borrowers often expect lenders to hold their allocation to maturity as a sign of commitment to the relationship.
Recently we have been speaking with banks looking to sell their Non-Performing Loan portfolios to funds that operate in the distressed space. Meanwhile, funds are looking for a trusted third-party source of pricing for loans. Without a proper secondary market, and with many loans in Asian currencies, there is a lack of transparency and comps are not easily obtained, which makes investments more challenging. In other words, it is interesting but early days here.
Medita Vucic, Group Manager for U.S. Financial Institutions: The U.S. captures the largest share of the $3 trillion global syndicated lending market, primarily driven by investors’ continued search for yield and diversification. Loans will continue to be a driver for both private debt and Separately Managed Accounts (SMAs), as will the renewed interest in the CLO market.
However, the loan asset class is not very efficient as it is very paper-based and market participants are looking for more transparency. In order to achieve transparency, there will need to be investment in technology and operations. The question outstanding in the market is how can managers achieve that operational efficiency, when adding more bodies generally is not the solution they are looking to adopt.
O’Brien: Exactly. The need is for efficiency in terms of time to market and in terms of settlement period. There is anywhere between five and 21 days as a settlement date for loans. If you look at a bond, by comparison, there is typically two to three.
The market is looking to reduce that time window so that they reduce their counterparty exposure and have more efficiency as they run their portfolios.
Read Part 2 of our Corporate Trust Expert Conversation for more detail on the service and technology innovations that address client needs for efficiency and transparency.
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