A Singapore-based fintech, iLex, has gotten six global banks to sign up to its new platform to digitize the market for corporate lending and structured finance.
In addition to his former employer, Société Générale, iLex has gotten BNP Paribas, China Construction Bank (Asia), DBS, MUFG and Standard Chartered to join its platform.
iLex’s founder and CEO, Bertrand Billon, says digitization is the key to transforming a lending activity into a capital-markets business, which could unlock enormous potential liquidity and trading volumes in corporate loans.
The loans market
The syndicated loans market today is vast, with around $4.4 trillion of new loans arranged by banks annually over the past three years, according to Refinitiv. There is also a roughly $1 trillion-plus secondary market for those loans (including leveraged loans), plus perhaps another $850 billion of private credit managed by private debt funds.
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Billon says iLex has the potential to create a trading environment for loans comparable to bonds. The difference is regulatory: bonds are securities, whereas iLex will remain a technology layer, a “reference matching business”, as Billon put it to DigFin.
The loans market is big, but it is not liquid. Loans are a form of debt, like bonds, but they are not securities, available to trade on an open market. By nature, loans are bilateral arrangements between a borrower and a lender, usually a bank. Unlike bonds, loans are tailored, and warehoused on a bank’s balance sheet.
Securitization is the process of transforming pools of loans into a tradeable instrument. Securitizing US subprime mortgages became highly lucrative for the investment banks arranging these instruments, but the industry ignored the risks of detaching loans from the original borrower, and the resulting 2008 financial crisis nearly destroyed the entire industry.
Since then, the Bank for International Settlements and national regulators have imposed stringent controls on bank loans, including higher capital reserve requirements. The business has become boring once again, with corporate finance sitting at the unglamorous corner of the investment bank trading floor.
Billon is betting that going digital can help return some of the corporate loan market’s swagger without endangering investors or creating systematic risks.
To date, there has been no big platform that has achieved this. The consumer loans market is very digital now, because these loans are standardized. Big corporate borrowers require customized loans, often as part of complex financing strategies, and they’re not about to negotiate these on a bank’s mobile app.
Another reason for the lack of a digital platform is that the origination of these loans is typically done through personal relationships. Some bankers would like to keep it that way.
Finally, although there exists a secondary market for loans, it is specialist and turnover is low compared to bonds or stocks.
Billon’s goal is to provide alternatives to the traditional market by proving the business model in Asia, including Singapore. Asia Pacific is a small part of the corporate loans market, with $740 billion of annual new issuance (or 17 percent of the global market), according to Refinitiv. But the Monetary Authority of Singapore is keen to promote fintech and develop innovative financial markets. Once the business proves itself in Asia, iLex can tackle the big, sophisticated loan markets in the U.S. and Europe.
“We have the opportunity to support the transformation of this business from a banking, relationship-based one, to a capital-markets business,” Billon said.
This requires banks shifting from a model of originating loans that stay on their balance sheet, to one where they distribute (sell) these to investors. To do so requires a trading platform and the infrastructure to manage transactions.
The core of iLex’s business is a matching engine and execution capability that is meant to provide the sort of trading environment of a stock market.
A second aspect is data aggregation and analytics to provide insights into the loans and credit of borrowers.
Third is what Billon calls a “private, interactive deal site”, a space in which lenders and investors can conduct due diligence and negotiate prices.
Because iLex is handling loans, not securities, there is no market-based price discovery. It’s still an industry in which relationships count and players need to be invited to a deal.
Billon describes the trading process for loans as a hybrid between trading bonds and private equity. Loans are issued to corporations in size – the average primary issue is around $500 million. The secondary market for these is small, but expected to grow, especially in Asia Pacific.
Billon expects his platform can increase both the size and speed of deals by making deals easier to source, investigate, and transact; as well as by making it attractive to more investors, including asset managers, private debt funds, and alternative lenders such as insurance companies, pension funds, and sovereign wealth funds.
iLex hasn’t built all of this by itself. It has partnerships with other vendors to create a range of services, including Debt Domain, an arm of IHS Markit, that provides documentation on primary issuance; Refinitiv for reference pricing data; AWS for cloud hosting; and S&P Global Intelligence for quantitative credit ratings.
The fintech brings its own proprietary trading tools, A.I. for matching assets to investors, and market analytics for trading.
The business commenced in early 2021 but required a long lead time to onboard participants. Billon says there are now 300 financial institutions in Asia Pacific registered on the platform, of which 80 are active. There is $3 billion of assets listed on the platform. The first electronic trade (which Billon says is the first ever) was completed in late 2021.
Now the business is ready to scale. Announcing its first partner banks is part of an effort to make the market more efficient and accessible. “We are launching scalable pilots with each of our partner banks,” Billon said. “They all want to go digital.”