iLex brings the private debt market into the electronic age
23:18, 5 December 2021
Over 40% of fixed income trading by notional value is now conducted electronically but according to Bertrand Billon, founder and CEO of Singapore based iLex, the equivalent figure for the private debt sector is close to zero.
Billon aims to change this by moving the private debt and syndicated loan markets into the electronic age.
“Our ambition is to bring electronic trading in the loan markets to 15-20% within the next five or 10 years,” he tells Capital.com over a video call from Singapore.
iLex lists $3bn of assets in 9 months
The early signs are promising, since its launch in January 2020, iLex, Asia’s first multi-dealer electronic market for corporate loans, saw $3bn of assets listed on its platform by the end of October, and has onboarded 70 bank and non-bank lenders.
The exchange works using a proprietary AI-powered matching algorithm that connects loan sales and distribution teams with lenders across Asia-Pacific markets based on analysing key loan data points and historical deal records.
Before the end of 2021 the exchange will launch iLex 3.0, which will improve areas such as market visualisation, enquiry trade flows, and integrate IHS Markit’s ClearPar settlement system. The new version of the platform will also include S&P Global’s Risk Gauge Scores for private companies.
“What happened in the public stock and bond markets will also occur in private markets. Go back 20 years and loans were a 100% bank relationship based, balance sheet business. This has changed to the situation you have today where it’s a capital market made up of lots of players from banks to financial institutions.
“The next step will see it encompass private wealth firms, high net worth individuals and ultimately retail investors. That’s the nature of the evolution we are now seeing,” Billon adds.
What are private debt markets?
Private debt markets traditionally include loans made to firms with annual earnings in the region of $10m to $50m. Billon is also looking at the syndicated loan sector, which provides credit to firms that are larger than those in the private debt sphere but are not big enough to access the corporate bond market.
Syndicates can be made up of firms including both banks and non-bank financial institutions, the latter group includes insurance companies, pension funds, mutual funds and collateralised loan obligation structures.
While these loans sit in the financial accounts of the individual lenders they are not specifically identified as such, thereby making them private. There is also a healthy secondary market in trading syndicated loans.
$4trn of syndicated loans issued annually
The syndicated loan market is huge. Thomson Reuters estimates there is roughly $4trn of new syndicated loan issuance annually, with the secondary loan market clocking in at about $1trn a year, according to figures from industry body the Loan Syndications and Trading Association.
And the sector is still expanding.
“Private debt is the fastest growing asset class in the financial markets, perhaps with the exception of crypto,” says Billon. “It’s also about the bank debt driven syndicated loan market vs the non-bank lender driven private debt market,” he adds.
The mention of crypto raises the obvious question of where blockchain, or distributed ledger technology, fits in the picture. Loan market players are looking to adopt this approach according to a November 2020 survey by the Loan Market Association which showed that 17.7% of the members surveyed are using or looking to use blockchain in their business.
No blockchain solution - yet
Billon says, however, this misses an important step in market development – the aggregation of liquidity in a centralized point.
“What is needed is a market infrastructure, such as an exchange or private markets, a place where demand and supply can be matched. That is what iLEX is trying to build. For a market to be created it first needs to be centralized. After the players are aggregated, then you can decentralize it.”
“There are a lot of issues to solve because the loan sector has been untouched for 20 years. Now there are still lots of inefficiencies, everything is traded by voice, over the phone, over the rolodex, there are still even some faxes involved.
Another issue is a lack of standardisation of documentation and data models before a smart contract model can be applied to the loan sector. Once these issues are resolved, however, Billon says the potential for tokenisation of a sector where ticket sizes are typically $20m in the US, and about $10m, in Asia-Pacific is clear.
Tokenisation of private debt is possible
“Not many investors can take investments of this size onto their portfolio directly and one way this can change is with fractionalisation, or tokenisation of the assets but there is still a lot to do before that can happen.
“But is it possible to tokenise the loan market and once that is achieved it will offer many more opportunities for investors because it will enable them to access the private debt of numerous companies in small tickets.”
The CEO also points to the absence of regulatory clarity around loans which are not currently classified as securities. Then there is the issue of lack of a centralized registry of loans.
“This is very important because you need to know who holds what. This registry can be done via a distributed ledger but also with a centralized market. It doesn't make a big difference which solution is used but there needs to be a single source of truth about who holds the assets.”
The Covid effect
The final hurdle to tokenisation of the loan market is the issue of interoperability of traditional and digital asset classes.
“You can't have one production chain running for the traditional loan sector with agencies using traditional systems and settlement approaches and then another part which is digitised. So the question is how do you make this interoperable? This is a big barrier for the adoption of blockchain solutions to the private loan sector.”
A blockchain-based loan market may be some way off, but Billon is confident that the loan market will electronify faster than the fixed income sector. Firstly, because banks are now focussing on digitalisting their businesses and also because of the catalysing effect of Covid.
Whereas previously, the loan market made heavy use of roadshows with financial institutions clocking up the air miles meeting investors across Asia to tout their wares and gauge potential interest the pandemic has forced the sector to adopt a new approach.
“Covid has changed the way people work. For loan syndication you can no longer do a roadshow, previously you would go to Taiwan and Korea to meet investors, to understand their interests and find out what they want to do next year. Now you can do all this on the platform in a split second.”