Quarterly Market Snapshot: Macro Pressures in a Bifurcated Market
DebtX Team | 12/06/2022
Many banks pursue multibank loan transactions (syndications or participations) as an integral part of their growth strategies. In addition to generating increased revenue and profitability through favorable upfront and arrangement fees, multibank transactions enable banks to mitigate overall portfolio risk and retain their most desirable and rapidly growing customers by supporting their increased borrowing needs even when those needs exceed the banks’ individual lending limits. This is particularly impactful on the growth and key client retention rates of smaller banking institutions.
While it is necessary to develop a buttoned-down methodology to structure and syndicate these deals effectively, the related back-office Agency function is likely to become deficient far sooner than the syndication function.
Most banks without dedicated capital markets teams can and do syndicate small numbers of deals through sheer force of will and manual effort. Transactions led by smaller institutions typically are club deals with one to a handful of co-lenders at most. Good loan officers or other personnel can cobble together a bank group by making phone calls to friendly institutions (typically smaller and not competitive threats) and figure out ways to complete the due diligence process using secure email or some other file sharing approach.
As banks look to become more strategic about their syndications, the natural tendency is to focus on centralizing and standardizing the front office capital markets (syndication) function. However, decisions made through this lens tend to be short-sited and overlook the agency risk related to managing a portfolio of syndicated deals.
Oftentimes, we hear bankers say, “We only do about 10-15 multibank deals a year, so it’s not yet enough volume to change how we do business.” This may be true on the front end, but if you assume a 3–4-year average life, there may be as many as sixty multibank deals in the bank’s portfolio, managed individually and without a cohesive Agency strategy and tools to support the business.
Syndicated transactions are process, documentation, and communication “heavy” transactions in comparison to bilateral loans and present increased IT security and agency risks. IT security relates to how the institution manages and controls security related to confidential data. Agency risk relates to the increased responsibilities and obligations of being an agent on behalf of the bank’s co-lenders.
As bankers increasingly adopt syndications and participations as key lending strategies, they should consider and address the fundamentally different back-office requirements up front and determine the best ways to ensure that revenue growth and key client retention rate goals are achieved without introducing an unacceptable increase in IT security and Agency risk.
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