Lenders: get with the times or get out
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Lenders: get with the times or get out

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The syndicated loan market is undergoing a transformation. Borrowers are growing in sophistication and artificial intelligence is creeping into the syndication process. It's time lenders faced a reality check: get with the programme, or get gone.

The loan market is resistant to change, and in some respects is proud of that fact. But some sweeping changes are already underway and lenders must accept a new way of doing things if they want to keep up. 

Borrowers are educating themselves on how to self-arrange loans, which is having a tangible impact on syndicated volumes. According to one loans banker, some frequent borrowers are even recruiting veteran syndicate officials to reduce their outsourcing costs. And that's not all; as liquidity swells and demand drops, fewer borrowers are requesting that banks underwrite loans

Be small

Those factors have left syndicate lenders in quite the pickle. As year to date volumes have plummeted — down by 43% year to date compared to 2018 — there is growing anxiety about the future of their business and job security.

One set of solutions is straightforward. Banks can cut down the numbers of staff on their syndication desks, specialise in certain sectors and regions and integrate financial technology into their workflow. 

If borrowers keep cutting the number of coordinator roles they offer, meaning banks must accept lower fees, then it is no longer feasible for lenders to have syndication desks stuffed with swathes of managing directors and vice-presidents, a set-up still rife across the Street. Efficiency should be a priority — now more than ever. 

ING axed five senior members of its London-based emerging markets and loans team earlier this year. A source close to the matter had confirmed poor loan volumes as well as preparation for bank restructuring were two of the primary reasons behind the move. 

Be special

In an over-populated banking sector flush with liquidity, where club and self-arranged deals are becoming commonplace, banks would do well to position themselves as specialists in certain sectors or regions, to offer borrowers a genuine benefit to transacting with them.

Specialisation has worked especially well for banks like ABN Amro, ING and Rabobank which have fostered the green loan market in recent years. This has put them at the top of the list of banks to be mandated by borrowers for socially responsible debt raising. By specialising and embracing an advisory role, whether it be by sector or industry, banks can differentiate themselves when every shop in the Street has ample cheap money to hand out. 

Regional specialisation is another area that some lenders have neglected. Banks such as ING, Société Générale and UniCredit have cemented their positions as go-to lenders for central and eastern European borrowers, for example.

Be smart (artificially)

But perhaps the trickiest change lenders will need to make is embracing financial technology (fintech). A Loan Market Association survey from earlier this year indicated that lenders were unfit for fintech. A staggering 88.5% of participants said they did not know as much as they should about how technology would likely affect their business. 

Many appeared concerned about the application of fintech to their day to day work, and justifiably so. Loan bankers are always quick to speak of their market's resilience and resistance to change, but this has the potential to be its Achilles heel.

The robotisation of certain functions within the syndicated loans market means that lenders will no longer need huge syndicate desks trawling through years of records to determine the most likely syndicate or the best pricing on a deal. Some 54.7% of participants in the LMA survey thought their organisations had already been affected by the growth of fintech. 

Last year, ING and UniCredit backed an Italian start-up, Axyon AI, the central core of which is to bring artificial intelligence (AI) to capital market issuance. Part of Axyon AI is SynFinance, an AI product that has the capacity to analyse and examine "the entire history of the syndicated loan market as captured by [market data company] Refinitiv". 

Such technology could helps banks identify pricing benchmarks — for both execution and marketing — and identify the best investors to approach with any given deal.

"The algorithms do a lot of the work in other asset classes — in equities and even bonds. But in five to seven years, there is going to be a very different landscape here in our market. And it's worrying. This could be the last generation of human syndicators," said a senior loans banker in London.

More lenders should take the approach of ING and UniCredit and integrate AI into their workflow if not to steal an advantage then at least to keep up. One senior banker at a leading Asian lender told GlobalCapital that his team had shown no indication of incorporating AI into their day to day activities, referencing a lack of knowledge in the area. 

The loan syndication business may not be a "dying business", contrary to what one market veteran recently told GlobalCapital, but it is certainly at an existential crossroads. 

Lenders must realise that they need to move with the times or lose out.