The Quiet Revolution in Loans

The leveraged loan market traditionally has been plagued by a lack of settlement liquidity, with an average settlement time for simple transactions in the secondary market hovering around the 20-day mark. But things have begun to improve.

The beginning of a revolution is often defined by a single event – an act of defiance, a technological advancement. Looking for an inflection point makes it easier for us to conceptualize people’s will for large-scale change and to disseminate that understanding through society. The true origin of a revolution, though, is almost always much more subtle.

This is as true in financial markets as it is in society. While an event can be the catalyst for significant change, the seeds must have been planted well before, and momentum must already be pushing sentiment in that direction.

The leveraged loan market is often described as the least mature, and with an average settlement time for simple transactions in the secondary market hovering around the 20-day mark, it’s obvious why. Many reasons are cited for this lack of settlement liquidity: KYC delays, slack adherence to best practices, lack of automation, antiquated technology, cash management and even a shift in domain expertise demographics as a result of cost-saving exercises.

All of these are significant challenges, and when any of them are solved holistically, we will hear about it and will remember them as significant markers on the road to change. As a builder of platforms, it is clear to me that some of these things can most certainly be improved or solved through technology, some of it existing technology. In the loan market, however, technology alone is not the catalyst for change.

The truth is that the revolution has already started. It’s grassroots. It’s local. It’s personal. It was started by people who have had enough and are not going to wait for the market to solve all their problems. They want to do better. They need to do better.

Between 2011 and 2013, secondary par transfer volume increased by 50% during a dramatic growth period for the market. However, T+ efficiency declined by 27%, cementing opinion about settlement liquidity.

Then, in 2014, something changed. Despite a further 34% increase in secondary par transfer volume, T+ times improved by 8%. While the change may be subtle, it is important. It represented the first year-over-year improvement since 2011 and occurred during a record year for transaction volume. This year, T+ continues to move in the right direction, improving by another 7% in the first quarter.

When people decide to do things differently, the effect is contagious and the systemic impact can be transformational. You start hearing words such as ‘change,’ ‘solve,’ ‘different’ and ‘better.’ You can have the will to lead, or you can choose to follow, but the destination is the same. The journey has begun, the movement is growing and the market is already better for it.