The time is now to digitize syndicated commercial lending

In case you hadn’t noticed, technology has made huge advances over the last 10 to 15 years. In all that time, however, the commercial loan syndication market has resisted the pressure to digitally transform.

Until recently, there’s been enough profit margin to support the heavily manual, labor-intensive processes that still underpin syndicated lending. But with volumes and distribution activity increasing fast, and banks tightening their belts, loan syndication operations are now rapidly approaching the limit of their resources.

The big loan booking data challenge

In a highly data-driven market, syndicated lenders and their partners on the buy side must capture and communicate vast amounts of data on the loans being booked.

Every syndicated loan, for example, comes with a complex credit agreement – usually a PDF that can run to hundreds of pages and is distributed by email or fax. The details of this document must be entered not only into the loan agent’s downstream loan accounting system, but also the fund accounting systems of anything from 50 to 300 buy-side funds.

Many of the latter aren’t built to manage loans. But even if they were, syndicated loan agreements are far from standardized. So, with their different ways of talking about pricing, interest, recalls, covenants and so on, the many analog data points can be difficult for automated software to process.

Back at the agent bank, there will also be multiple people helping to service each deal – as many as 60 in some large institutions. For buy-side fund managers, then, it’s not always clear who to contact about any issues with booking a loan.

Loan servicing errors and amendments

Even once a syndicated loan has been booked and the funds have been dispersed, the operational challenges continue.

After a month or a quarter, the first servicing event will see the agent bank send notices to all the loan’s investors on the buy side – again, usually as PDFs.

Processing these documents is no mean feat for buy-side funds, many of which will have invested in multiple syndicated loans. And although fund managers may use robotic process automation (RPA) to “read” the notices quickly, this approach can be unreliable and errors will need to be reconciled and fixed manually.

All this takes considerable time and effort. Plus, in the current economic environment, more borrowers than ever are looking to reprice, restructure or extend their loans. Now, with amendments at record highs, there’s even more chaos in already complex syndicated loan processes.

Any errors in or discrepancies between loan agent and investor records, whether at the booking or the servicing stage, will have a knock-on impact on data quality further downstream – and could hold up the next stage of the lending life cycle.

For the more accurate, efficient and cost-effective processing of syndicated loans, the market needs to go digital fast.

Digitization, standardization and connectivity

From digitization comes the opportunity to automate more syndicated lending processes and find new efficiencies throughout the lending life cycle.

For example, by digitizing complex loan contracts, agent banks could make complete sets of credit agreement and contact data available over APIs for integration into downstream solutions.

And with digitally streamed, rather than static PDF, notices, it should be possible for every buy-side system to accurately read and automatically process details of, say, payments against a loan.

For end-to-end automation, though, it will also be critical to standardize syndicated loan data, including how the market refers to different pricing types or methodologies.

Currently, different agents may describe or classify their deals in different ways, so there needs to be a single set of industry identifiers for both lending and buy-side systems to process.

Speaking of which, all of these solutions must be able to seamlessly connect with and easily talk to one another, too. Today, with their diverse data models, there’s a marked lack of interoperability between the various loan servicing and fund accounting systems on the market.

An ideal digital future

The good news is that plans are already afoot to digitize, standardize and connect the syndicated loan market.

At the core of this transformation will be, ideally at least, one central data service – a hub for exchanging, normalizing and reconciling data between different agent bank and buy-side fund accounting systems. Even if there is more than one of these services, the key is that each uses the same loan identifiers and normalized data.

Now, the onus is on technology vendors to invest in developing their solutions – ultimately so that they can interoperate in a new, wholly digital platform ecosystem for managing syndicated loans.

From digitized credit agreements to event-streaming solutions for loan servicing, there are massive opportunities to transform the systems and processes that power the syndicated loan market.

All the market needs to do is stay up to date with the digital technology at its disposal. Watch this space.