For investors in the primary syndicated loans market, getting insight into what deals are underway can be the difference between a win and a missed opportunity. On the flip side, for those financial institutions repackaging syndicated loans off-balance sheet into collateralized loan obligations (CLOs), time and accuracy of the data are of the essence.
To date, lenders have struggled to stay ahead on both fronts because of inconsistent information about the syndicated loan and CLO markets across institutions and even single transactions. Today, new technologies and methodologies for identifying syndicated loans are available to lessen the administrative complexities of monitoring and tracking these deals.
A Closer Look at the Syndicated Loans Market
According to data from Bloomberg, the size of the global market for active syndicated loans was estimated at $13.6 trillion at the end of 2015, with more than 50,000 syndicated loans for more than 40,000 unique borrowers. Despite the market’s size, the absence of a universal global identifier for tracking syndicated loans makes it difficult for lenders to monitor them with enough lead time to engage book runners and participate in deals. When these loans are repackaged or assembled into CLOs, the lack of a universally accepted way to identify these deals can make it difficult to compare the underlying loans within the CLOs.
Loan identification and tracking becomes more complex once they are traded on the secondary market or repackaged into CLOs. With the market for CLOs approaching $45 billion in the U.S. this year, according to estimates from Bank of America Merrill Lynch, the challenges investors face tracking and comparing loans in the secondary market becomes more concerning. The lack of a unique global identifier to help track deals also presents an issue for end investors in CLOs who are trying to compare the relative performance of the CLOs they own. In the absence of a standard identifier, loans can be reported using different names (legal entity, brand name, etc.). For example, the same loan for Toys R Us could be found under no fewer than 16 different IDs, including TOY; TOYS; TOYS “R” US-DEL, INC. and TOYS R US DELAWARE. Some organizations are adopting a new standard practice for identifying syndicated loans that could alleviate this confusion.
Testing the FIGI Standard in the CLO Market
Last spring, U.S. Bank became the first corporate trustee operating within the CLO market to attempt to solve the identity crisis inherent in the syndicated loans market by adopting the Financial Instrument Global Identifier (FIGI). An international open data standard available to anyone, FIGI can identify any financial instrument, including syndicated loans, with no attached costs and no restrictions on use and redistribution.
This meant that U.S. Bank was able to display the FIGI across all loans in its CLO reports, unifying disparate symbologies with a single identifier that could be created at an instrument’s inception and maintained throughout its life. This reduces the potential for confusion and inefficiencies. In addition, the use of the FIGI in U.S. Bank’s CLO reports allows investors to have consistent communication and greater transparency into what they are holding in any given CLO investment.
How the FIGI Works with Syndicated Loans
The FIGI symbology’s strength lies in its metadata, which is publicly accessible and, in the case of syndicated loans, contains details about the size, currency, maturity and primary legal entity borrower.
In addition to utilizing metadata, the FIGI differs from the existing classification systems in that it does not change throughout its lifespan. Whereas a bond can be issued in a matter of hours, syndicated loans typically take four to six weeks to come to market, from announcement to allocation. During that time, investors often use “dummy IDs” while reviewing the deal, through the allocation process, and often even during the initial secondary market trading. In the past, some identifiers were only assigned to loans once a deal was allocated, often leaving traders and closing desks in limbo for days, and, in some cases, even weeks, creating operational risk for settlement teams. A FIGI can be assigned earlier in the lifecycle of a loan.
As the registration authority (RA) for the FIGI, under the auspices of the industry standards organization Object Management Group (OMG), Bloomberg issues a unique FIGI for each loan approximately three weeks before closing and allocation. A lender, or an arranger, can also request a FIGI prior to, or as part of, the syndication process. In either case, the assigned FIGI is available for the duration of the instrument’s life, eliminating the need for temporary “dummy IDs.” From the investor perspective, this simplifies and streamlines internal data management processes, improves data quality and provides the ability to monitor loans at all stages of the lifecycle.
The final benefit is in the permanence of FIGI. It will never change throughout the life of the loan and will never be reused, providing an unchanging historical reference point from creation through the lifecycle and remaining even after it ceases to trade in the marketplace.
Inevitable Evolution of Syndicated Loan IDs
The adoption of a universal global identifier for syndicated loans and other instruments can only bode well for enhancing transparency across the financial markets and providing investors with easier access to more accurate descriptive data and pricing. Beyond U.S. Bank, Deutsche Bank and State Street Global Advisors are among the major institutions that have adopted the FIGI. Financial technology firms are also integrating FIGI into their systems. Virtus Partners, a provider of tailored fixed-income services, adopted FIGI for loans and other credit-based structures in October of 2015.
The FIGI standard is growing in adoption across the financial services sector. More than 300 million FIGIs have been assigned, and investors are requesting their inclusion in prospectuses and other reporting documents. The FIGI, and the metadata that comes with it, can help banks and other investors in the syndicated loans market streamline internal workflows and investment process as well as improve overall data quality, external reporting and communication with market participants. Users can set up a free account at openfigi.com.