Syndicated loans tech, processes lag other markets. Bank-backed Versana wants to change that

Alex Naboicheck, head of US loan trading at Bank of America (BofA), hasn’t seen much modernization in the syndicated loan market in his more than 10 years at the bank. “If you talk to someone who’s been here as long as I have—or people who’ve been here even longer—the syndicated loan market really has not modernized over that period of time,” he says.

Syndicated loans have seen tremendous growth since the 1990s. After the market collapsed in 2007/8 during the global financial crisis, it rebounded, and term-loan originations reached $2 trillion in 2013. A June 2021 report from consultancy Coalition Greenwich found that the first quarter of 2021 saw $263.9 billion in new loans being issued in the US and Europe. Collateralized loan obligations (CLOs), which tend to be the biggest buyers and holders of loans, saw a record issuance of $39.3 billion in the first quarter as well.

Technological innovation did not keep pace with that growth. Manual processes—phone, fax machine, and email—still dominate dealmaking and information sharing. Something had to give.

To better understand where improvements were needed, in 2018, Naboicheck flew to Charlotte, North Carolina, to spend time at Bank of America’s corporate headquarters. “I spent a ton of time with our operations team and back-office partners who were based out in Charlotte and sat with them and learned about what they did every day,” he tells WatersTechnology.

And BofA wasn’t the only bank investing time examining what fixes could be made internally. JP Morgan was also having similar conversations behind closed doors. So, the banks came together to brainstorm what could be done to modernize the market. Those efforts coalesced around data.

Data deluge

Compared to high-yield bonds or securities, there is no centralized depository or settlement function, Naboicheck says. Data is held by agent banks like BofA, JP Morgan, Citi, and Credit Suisse, which keep their own official books and records. “There is no golden source record across the Street. Each bank keeps its own golden source,” he says.

When a new issue loan comes to market in the primary market, the data from that loan sits in the loan agreement. That data is inputted into the agent banks’ systems manually and is sent to data providers, typically through a fax. “Our clients—the lenders who lend to all of these companies in these syndicated loans—need to keep track of interest payments, of paydowns, of spread changes, of current outstanding,” Naboicheck says. “They may have their own internal systems as well that they then need to track what they know the agent knows they own. Right now, that is a manual process that has to get done via confirmations via fax machines.”

We came to the realization that the underlying data the agent banks hold needs to be fixed, standardized, and improved, and that’s where the origin of Versana really started

Alex Naboicheck, Bank of America

Enter Versana. Officially launched last month, Versana is a cloud-based, software-as-a-service (SaaS) data platform that aims to provide both the buy and sell side with a centralized golden source of data that would normally be kept in siloed systems.

Paydowns and spread changes are just two factors in loan markets that are in constant motion and changing, says Cynthia Sachs, CEO of Versana. Because of those constant changes, systems on both the buy and sell side were unable to keep up with changes that had to be calculated.

“The agent bank has to calculate that as the system of record and then the buy-side firms, which are managing money for their investors, have to also maintain their books and records, and do a calculation,” she says. “So you can imagine many times you would expect the calculation, and you would hope they match after a quarter where an interest payment would come in,” but they don’t end up matching. As a result, a break occurs, resulting in the buy side calling or emailing the agent bank, overwhelming agency functions and delaying settlements, which in loans can be close to 19 days.

“We came to the realization that the underlying data the agent banks hold needs to be fixed, standardized, and improved, and that’s where the origin of Versana really started,” BofA’s Naboicheck says.

Foundational steps

Born from a consortium operating under the name Project Sloan that includes BofA, JP Morgan, as well as Citi and Credit Suisse, Versana wants to bring real-time data to a corner of the industry that hasn’t had the transparency other asset classes benefit from.

Users can access data through the platform or through an API that connects to their own internal system for a real-time view of their current positions, commitments, and outstandings. Just like how people can view their checking and savings accounts by logging into their bank accounts online, Versana is pushing for the adoption of a similar self-service model.

The creation of the company, as well as its appointment of Sachs as CEO, was announced last March. Sachs is a fixed-income veteran who has worked at Bloomberg in fixed income valuations, as well as at Morgan Stanley, Natixis, and Bank of America. In July, David Kamp joined as CTO, having previously served as CTO at LTX, a corporate bond trading platform backed by Broadridge.

“One of our goals is to make this as frictionless a process as possible—meaning easy to pull data in, put it in a canonical format, secure it, and then push the data out to those who have entitlements to it,” Kamp says. The platform uses event processing and data pipelines to validate and move data through the system as well as smart contract technology from Digital Asset. It sits on PostgresSQL, an open-source database.

In a private market filled with confidential information, privacy is paramount, Sachs says. Versana was designed to be permission-based, and smart contracts ensure users only access data relevant to them. “We looked at [using smart contracts] as a foundational piece of technology that we can grow with and allows us to go in different directions,” Kamp says. “We weren’t necessarily making a bet that we need to be on the chain, but it is something that we can do as we start to evolve this.”

“The fact that somebody is able to manage that loan portfolio in a way that creates data flow between firms where everybody understands the data’s format and the way the data is presented is important because it really didn’t exist,” says Audrey Blater, a senior analyst in the market structure and technology group at Coalition Greenwich. “People in this industry are not used to using these types of tools because they just hadn’t been invented, but they’ve been alive and well in other asset classes.”

Versana is not alone in trying to modernize loan markets. Last summer, Octaura formerly launched as a company aiming to bring electronic trading to syndicated loans and CLOs. Octaura, like Versana, sprang from a consortium founded by Citi, Bank of America, Credit Suisse, and JP Morgan that operated under the name Project Octopus.

Sachs says creating one large platform won’t fix the fragmented technology landscape that exists in the syndicated loan market. “It will be solved by creating structure and standards that allow different technologies in various parts of the loan lifecycle to integrate seamlessly. Over time, our foundational platform and business model will evolve, and accordingly, we will grow multiple revenue streams as we offer more solutions,” she says. “For now, in order to properly modernize the asset class, it is essential that Versana focuses on building a reference data platform.” 

In both consortiums, participating banks have not only funded efforts but also contributed important elements to the offerings. Octaura will use both Citi’s CLO BWIC protocol and Bank of America’s Loan Match protocol, while Versana has golden source data from its four founding agent banks, which have also joined the platform as its first adopters and subscribers.