Trends in Loan Agency and Regulatory Compliance

As financial markets have matured and expanded, the need for standardization and regulation has become apparent. Some of the changes that have taken place over the past couple of decades have facilitated markets and led to efficiencies while, at the same time, have attracted scrutiny by regulators. The team at SRS Acquiom provides a look into the evolution of the loan market as it pertains to the current regulatory landscape.

Trends in Loan Documentation and Technology

Structures and Trends

Among the ever-evolving credit markets, portability, and liability management have recently come into focus and are expected to command more attention in periods of distress.

• Portability
  
  Portability, a provision permitting a credit facility to remain in place despite a change of control, sometimes makes it easier for mergers and acquisitions. There is an increasing number of portability clauses being included in new mergers and acquisitions and leveraged buyout credit agreements.
  
  Amid the onslaught of refinancings seen in the first half of 2024 in the syndicated loan market, more issuers are proposing portability clauses in connection with their deals. For example, Epicor refinanced into an all-first-lien structure and included a change-of-control provision that would provide an incoming buyer with flexibility to issue junior debt relative to closing leverage. Similar deals were struck for Edelman Financials, Paradigm Outcomes, and Applied Systems.
• Unitranche structures 
  
  Unitranche structures—which blend senior and junior debt—are becoming commonplace in private credit. However, they can increase the risk of liability-management transactions given the super-priority ranking of revolving credit-line lenders compared with term-loan lenders. Disputes regarding rank could lead to “lender-on-lender violence” during a workout.
  
  Some notable cases where liability-management exercises were conducted include J. Crew, Envision, and Serta, to name a few. Should the financial markets enter a period of prolonged stress, the likelihood of an increase in such liability-management transactions in the aftermath of looser credit documentation would result.

Operations and Technology Advances

Operational performance is increasingly important within financial markets. The use of technology to customize and personalize customer needs carries high priority in the quest for fastest access to and transfer of money.

• Artificial Intelligence (AI) and Blockchain Innovations 
  
  AI may greatly improve the speed, accuracy, and certainty of settlement payments and transaction processes.

  Whereas the equity and bond markets recently transitioned to settlement terms of T+1, the loan market remains considerably slower at a settlement time of T+7. The use of financial asset tokenization and blockchain technology may provide opportunities to considerably shorten loan-settlement times and reduce administrative costs; however implementation will take some time.
  
  Advanced technologies such as artificial intelligence and automation may aid managers in replacing routine and repetitive processes. Streamlining phases of the lending lifecycle will enable managers to meet the demands of operational complexities as the markets mature.

Some other ways that technology has impacted loan administration include:

• Origination: Purpose-built software may replace spreadsheets and shared drives in managing deal pipelines, deal data, and workflow required for review and approval.
• Loan applications: Paper-based processes are often slow, inefficient, and prone to error. A digital onboarding platform can validate data, request additional information from applicants, and provide transparency.
• Credit view: Aggregating, standardizing, and validating data in real time from internal and external sources will enable smooth and efficient decision-making.
• Documentation of terms and conditions: Automation and standardization of lending documentation will help the review process run more efficiently.