Over 40% of notional fixed income transactions are now done electronically, but according to Bertrand Billon, founder and CEO of Singapore-based iLex, the equivalent figure for the corporate lending industry is close to zero .
Billon aims to change that by bringing the private debt and syndicated loan markets into the electronic age.
“Our ambition is to take e-commerce to 15-20% lending markets within the next five to 10 years,” he told Capital.com on a video call from Singapore.
iLex identifies $ 3 billion in assets in 9 months
The first signs are promising, since launching in January 2020, iLex, Asia’s leading multi-trader electronic marketplace for corporate loans, has seen $ 3 billion in assets listed on its platform in late October and has integrated 70 banks and non-banks. lenders.
The exchange operates using a proprietary AI-based matching algorithm that connects loan sales and distribution teams to lenders in Asia-Pacific markets based on analysis of major loan data points and historical transaction records.
Before the end of 2021, the exchange will launch iLex 3.0, which will improve areas such as market visualization, demand trade flows, and integrate IHS Markit’s ClearPar settlement system. The new version of the platform will also include S&P Global risk gauge scores for private companies.
“What happened in the public stock and bond markets will also happen in the private markets. 20 years ago, lending was a 100% balance sheet business based on a banking relationship. It has changed the situation you have today, where it is a capital market made up of many players, from banks to financial institutions.
“The next step will see it embrace private wealth companies, high net worth individuals and, ultimately, retail investors. This is the nature of the evolution that we are currently observing, ”adds Billon.
What are private debt markets?
Private debt markets have traditionally included loans to companies with annual revenues between $ 10 million and $ 50 million. Billon is also looking at the syndicated loan industry, which provides credit to companies larger than those in the private debt sphere but which are not large enough to access the corporate bond market.
Unions can be made up of companies comprising both banks and non-bank financial institutions, the latter group comprising insurance companies, pension funds, mutual funds and guaranteed loan bond structures. .
Although these loans appear in the financial accounts of individual lenders, they are not specifically identified as such, thus rendering them private. There is also a healthy secondary market for syndicated loan trading.
$ 4 billion in syndicated loans issued annually
The syndicated loan market is huge. Thomson Reuters estimates that there are about $ 4 billion in new syndicated loan issuance per year, with the secondary loan market reaching about $ 1 billion per year, according to figures from the industry body, Loan Syndications and Trading Association.
And the sector is still expanding.
“Private debt is the fastest growing asset class in financial markets, perhaps with the exception of crypto,” Billon says. “This is also the syndicated loan market focused on bank debt versus the private debt market focused on non-bank lenders,” he adds.
The mention of crypto raises the obvious question of where blockchain, or distributed ledger technology, fits into the picture. Loan market players are looking to take this approach according to a November 2020 Loan Market Association survey that showed 17.7% of members surveyed use or seek to use blockchain in their business.
No blockchain solution – yet
Billon says, however, that this misses an important step in the development of the market – the aggregation of liquidity at a centralized point.
“What is needed is market infrastructure, such as an exchange or private markets, a place where supply and demand can be matched. This is what iLEX is trying to build. For a market to be created, it must first be centralized. Once the players are aggregated, you can decentralize it. “
“There are a lot of problems to be solved because the credit industry has been intact for 20 years. Now there is still a lot of inefficiencies, everything is negotiated by voice, over the phone, through rolodex, there are even still a few faxes involved.
Another problem is the lack of standardization of documentation and data models before a smart contract model can be applied to the lending industry. Once those issues are resolved, however, Billon says the potential for tokenization of an industry where the size of banknotes is typically $ 20 million in the United States and around $ 10 million in Asia-Pacific is clear.
Tokenization of private debt is possible
“Few investors can directly integrate investments of this size into their portfolios and that can change through the splitting or tokenization of assets, but there is still a long way to go before that happens.
“But is it possible to tokenize the credit market and once that is done it will offer a lot more opportunities to investors as it will allow them to access the private debt of many companies in small notes.”
The CEO also highlights the lack of regulatory clarity regarding loans that are currently not classified as securities. Then there is the problem of the lack of a centralized loan registry.
“It’s very important because you have to know who owns what. This register can be done via a distributed ledger but also with a centralized market. The solution used doesn’t make a big difference, but there has to be one source of truth about who owns the assets.
The Covid effect
The final obstacle to the tokenization of the loan market is the issue of the interoperability of traditional and digital asset classes.
“You can’t have one production line working for the traditional lending industry with agencies using traditional settlement systems and approaches and then another part that’s digitized. So the question is how to make this interoperable? This is a big obstacle to the adoption of blockchain solutions in the private lending industry. “
A blockchain-based lending market may be far away, but Billon is confident that the lending market will electronize faster than the fixed income industry. First, because the banks are now focusing on the digitization of their activities and also because of the catalyst effect of the Covid.
Whereas previously the lending market made heavy use of roadshows with financial institutions racking up air miles meeting investors across Asia to tout their wares and gauge potential interest, the pandemic has forced the industry to embrace a new approach.
“Covid has changed the way people work. For loan syndication you can no longer do a roadshow, previously you would travel to Taiwan and Korea to meet investors, understand their interests and find out what they want to do next year. Now you can do it all on the platform in a fraction of a second.
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