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SunGard’s Hedge360: Bank debt

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As global banks deleverage and pursue a course of balance sheet strengthening, the opportunities to build exposure to bank debt have become numerous. Loan trading in 2013 rose to USD530bn. According to eVestment, floating rate bank debt was one of the top 10 most searched universes by consultants towards the end of last year.

The fact that this remains quite an esoteric asset class gives hedge funds an advantage over other market participants and the opportunity to look for value.
“If you look at our customer base, 10 years ago there were a handful of players in the loan space. Today, I would estimate 50 per cent of our customers have some form of representation in this asset class. It’s a high growth area and gives managers the opportunity to capture new sources of yield,” says Alintoff.
Such is the popularity of this asset class that other participants are starting to move in. There are now a number of bank loan ETFs in the market such as PowerShares Senior Loan Portfolio (BKLN) and SPDR Blackstone/GSO Senior Loan ETF (SRLN).
“As much as we talk about it as a hedge fund market, the consumer market is becoming just as aware,” says Alintoff.
Investors want access to alternative sources of yield with interest rates hovering at historic lows. Moreover, senior secured loans are less risky as lenders are first in line to recover their loans in the event of default. Standard & Poor’s Ratings Services found that bank debt loans have an average recovery rate of 74% compared to a 38% average for bonds (see figure 3). 
In terms of buying activity it spans the spectrum from commercial loans in blue chip names at one end through to distressed residential mortgages at the other. Alintoff notes that there is also interest in the private peer-to-peer loan market.
A recent article by Bloomberg News showed that in the New York area, hedge funds are becoming the unlikely saviours to homeowners with delinquent home loans. They have the chance to pick up these distressed assets at attractive discounts and there’s no shortage of supply: banks sold USD34.7bn in non-performing loans last year compared to USD13.1bn in 2012.
“The South West and Mid West of the US are also hot spots for loan fund activity. It’s a great market if you have the wherewithal and the sophistication but it is quite “old school” in the way that it operates and this creates a barrier to entry for a lot of players,” says Alintoff.
He illustrates a couple of the key challenges by stating: “From a trading perspective “events” can occur between trade and settlement (fundings, paydowns, etc.) which staff (accounting and closers) need to be aware of. Traders need good visibility into the loans they buy. They need to know if there’s delayed compensation on the loan, if it is closed and settled, if there are funding events. From a front office perspective, the information flow can be sparse.
“From a loan closer’s perspective, they need to be able to coordinate the settlement of these loans which requires having access to good data from the agent banks. We hear so many stories where loans should settle in 20 days, for example, and they’re getting settled in 90 days. If you don’t have a good handle on what’s happening over that period it becomes a big problem.”
It’s not just a front-office challenge. The back-office portfolio accountants need to understand the details of each loan position in a portfolio, its market valuation, so that an accurate NAV can be reported. That’s no easy feat if the manager is trading north of 1,000 different loan facilities.
With respect to loan pricing, Alintoff adds: “Most managers will subscribe to a third party data service but they still have to aggregate all of that data. Sometimes, prices come in from brokers via email. The back office has to then scrape out that information and house everything in one place to make sense of the data.”
What SunGard has done within Hedge360 is address this data-intensive exercise by bridging together different loan market players – the loan closers through to front-office traders and back-office accountants – so that these loans can be managed in a single environment.
“The centrepiece of that management solution is what we call the Loan Data Control Centre (LDCC),” explains Alintoff.
“It handles splits, combines, rolls, rate re-sets, paydowns, drawdowns, letters of credit; acting as a hub for all requisite loan market information. LDCC feeds our reporting system, our accounting system and gives managers a place to clearly observe their universe of bank debt and make sense of that universe.”
SunGard also works with external market players such as the LSTA and oversees a bank loan consortium of premier bank loan customers to discuss strategic market issues. As Alintoff notes, this helps ensure that “as software developers we aren’t operating in a vacuum”.
“Managers can more easily manage their bank loan portfolio within Hedge360, specifically using VPM in tandem with LDCC. It satisfies the entire view, front to back. This level of control and automation eliminates the need for managers to use disparate systems,” concludes Alintoff. 

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