Increasing Syndicate Group Sizes with LoanOS
Loan syndication is an incredibly attractive process to banks, as it enables a group of lenders to come together and divide up funding a loan for a single borrower. Thus, syndication permits banks to attract capital from a broad range of investors and diversify away any idiosyncratic risks associated with a particular loan.
One of the key constraints on a bank being able to participate in loan syndication is the size of the syndicate group, with smaller syndicates being much more limiting.
Therefore, one of the key considerations in this market is the size of the syndicate group, or the number of different parties subdividing and funding a loan. A larger syndicate is beneficial for all parties involved, as it relaxes constraints for banks on the capital that they have available for the loan.
It also provides banks with the capacity to increase their risk-taking with their overall loan portfolio, as they will have smaller sums of money funding each loan, and therefore have less to lose if a small number of loan trades are not profitable. As usual, higher risk tends to mean higher reward here, so a larger syndicate size means banks are able to take on riskier loans that also may be more rewarding if they go well.
By making a loan more attractive for both arrangers and participant lenders, a larger syndicate also lowers the cost of capital for the issuer. This means that the issuer can pursue profitable projects more often than they would if they were involved in a smaller loan syndicate.
LoanOS has the potential to increase loan syndicate sizes, thus offering a multitude of benefits to both lenders and borrowers.
The primary channel through which LoanOS can provide these benefits is through its increased transparency. This transparency occurs thanks to LoanOS’s blockchain basis, which makes all data associated with a loan available to all parties involved, at all times.
Such increased transparency will alleviate asymmetric information concerns among lenders, which are quite commonplace in the syndicated loan industry; because syndicated loan trades occur over the counter without centralized pricing, some loan characteristics are unobservable until a buyer actually comes into the possession of a loan. Resultantly, a loan buyer tends to have significantly less knowledge about the details of the loan characteristics than the loan’s seller.
A large body of financial research has been dedicated towards understanding the negative impacts of such information asymmetries. The overall consensus of the literature is that information asymmetries in the syndicated loan sphere are significantly associated with unfavorable syndicate attributes. For one thing, Sufi (2007) demonstrated that more opaque syndicates tend to have 25% fewer lenders than more transparent ones. Further, a study by Ivashina (2009) showed that asymmetric information accounts for at least 4% of the cost of credit for borrowers.
As a conservative lower bound, LoanOS would be able to bring the publicly known information about all borrowers in line with the standard set by the most transparent firms. That would mean that clients of LoanOS should be able to overcome the negative quantitative effects of information asymmetries that research has elucidated.
Using the numbers demonstrated in research in this space, LoanOS is projected to increase syndicate sizes by at least 25% and reduce credit costs by 4%.
Moreover, the benefits of LoanOS could be further reaching; the platform could set new standards for information provision that promote greater symmetry of information even for the most transparent borrowers. This means that LoanOS has the potential to increase syndicate sizes and decrease costs even beyond our more conservative projections.
LoanOS can additionally increase syndicate size indirectly by decreasing loan settlement times. According to the Loan Syndications and Trading Authority, the average loan settlement time for the first quarter of 2020 was T<18. LoanOS gives the possibility for loans to be settled in T<1, as a test loan on this platform took a mere 11 minutes to settle.
By drastically reducing loan settlement time, LoanOS enables banks to have their capital freed up much more quickly — possibly even within the same day. This enables banks to be involved in far more loan trades than ever before in the same amount of time, with the same amount of capital. This means that they would have the capital available to participate in more syndicates, resulting in an overall larger syndicate size.
In summary, LoanOS helps lenders increase syndicate size by drastically decreasing information asymmetries and speeding up loan settlement times. The resulting benefit is multifold, letting banks attract a wide range of investors and diversify their portfolios against risk.
For more information about Forest Park and LoanOS, please refer to our website at forestparkgroup.com or reach out to us via email at opportunities@forestparkgroup.com.
