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Commercial Lenders Warm to Debt Market
by Kingsley Greenland, co-founder and CEO of Boston-based DebtX
Commercial lenders are increasingly leveraging new technology to manage performing and non-performing loans, giving them a powerful new tool to enhance the performance of their portfolios.
The Internet in the past few years made it cost effective to actively manage loan portfolios and realize the benefits of improved diversification and risk management, greater access to capital for increased loan origination, and fewer headaches in managing problem assets.
The Internet also is accelerating the practice of active portfolio management by bringing buyers and sellers together to create liquidity in the secondary debt market, particularly for regional lenders who previously were shut out. By efficiently grouping buyers and sellers online, the Internet is creating opportunities and thus attracting a bigger pool of investors. Greater liquidity is significant by itself, but at the same time, the Internet is transforming the loan sale process. Using electronic platforms, lenders can now go online to conduct loan due diligence, and price and bid on a loan - eliminating the expense of travel costs and lost executive time.
Commercial lenders benefit from active portfolio management in many important ways. First, active portfolio management allows lenders to keep adjusting their portfolios to reach the optimal portfolio mix by geography, industry sector, loan size, payment history, length of maturity, or any criteria they choose. Second, active management - particularly for poorly performing assets - allows lenders to send the loans to market and quickly dispose of them. Instead of expending management time in a workout or a wait-and-see strategy, active management lets bankers dispense with problems and get on with the business of productive lending. Finally, institutions with a significant level of non-performers often have lower earnings and share prices.
The most frequent practitioners of active portfolio management are the largest lenders who bank the world's biggest companies, many of whom already benefit from a liquid secondary debt market. The reason is that the large customers enjoy the most transparency in the markets. These firms have high public profiles and regular coverage from equity and debt analysts. It is easier, for example, for large money center banks to find buyers for debt of a Fortune 100 firms than for a regional lender to sell the debt of a privately held firm with less than $100 million in revenues.
From a buyer's viewpoint, the traditional process also is time consuming and expensive. Buyers seeking to review a loan file or submit a bid must travel to a central location - known as a war room - to see original loan documents, collateral appraisals, operating statements, court proceedings or other documents that supported the underwriting process. One or two people usually make such trips. If the buyer fails to make a bid, or that bid is not accepted, those costs are lost. Most importantly, it's impossible to recover the time.
Before the Internet, buyers on the secondary market almost always were the large players - banks, insurance firms, and other institutional investors. Small lenders lack the resources to do the analysis and a large enough balance sheet to bid for a loan pool that could be hundreds of millions of dollars.
Streamlined Process
The Internet changes the process by promoting access and liquidity for large debt offerings, while making it possible to create liquidity for smaller offerings too. The Internet lets buyers do much of the analysis, due diligence, and bidding online by offering access to digitized loan documents formatted with text searching and spreadsheet capabilities. Now, a 5,000-page loan file can be reviewed far more quickly and efficiently than by using the existing manual process.
For the debt of larger companies, buyers can expedite the bidding process and make offers on more loans, thus creating greater liquidity. For the debt of smaller companies, it is now cost effective to conduct due diligence or inspect loan files for just a single loan, something that was prohibitively expensive before.
Equally as important is that technology helps buyers and sellers make more informed decisions about price. Sellers can compare loans of similar characteristics against an online database to help price an asset for sale. Buyers can do their homework easily by reviewing recent market activity by their criteria of choice. This data is particularly important for the debt of smaller companies, where there are fewer deals, fewer buyers, and less transparency.
Online bidding introduces dynamic pricing into an otherwise static environment. It gives buyers a chance to make bids in real time, rather than being locked into a single offer, as they are with an offline, sealed bid. The ability to adjust bids offers yet more information about the market's dynamics and enhances liquidity.
Looking ahead, the adoption of industry-wide XML standards likely will allow sellers to easily transmit loan files to online platforms. With further integration between sellers and electronic systems, lenders will reduce friction in the transaction by speeding up the preparation of the entire loan package. As a result, there will be even greater liquidity in the market.
Meanwhile, technology is reshaping the loan sale advisory business, giving all parties to the transaction a better way to access the secondary markets.
Kingsley Greenland is a co-founder and CEO of Boston-based DebtX, a leading dedicated loan sale advisor for commercial debt. He can be reached at kgreenland@debtx.com.
Copyright 2002 Thomson Media. All Rights Reserved.
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