Scale is a perennial consideration in the context of loan agency services. Depending on the nature of a particular deal, factors such as the number of lenders, the size and structure of the facility, and the needs of the borrowers can all influence the choice of an agent. These are some of the elements that help determine whether a large-scale, off-the-rack approach or a more tailored and collaborative approach will better address unique stakeholder needs.

In our experience, however, the question of scale often becomes confused with size. The two concepts are not synonymous. While size and experience do play an important part, they may also create the risk of a “one size fits no one” approach. While smaller teams might be able to craft a customized approach, they may not have the capacity or controls to handle large or complex scenarios.

This article will discuss a different way to look at scale and capabilities as factors in choosing a loan agent, which we describe as “flex.” Scale does not equate to size. Although size has some advantages, flex matters more to clients. It helps loan agency clients avoid the scale trap and find a solution that best fits their needs.

Prologue: Lessons from COVID-19

Some eighteen months after COVID-19 escalated into a global pandemic, we find ourselves reflecting on the more systemic lessons learned from adjusting to unprecedented circumstances. Rather than figuring out how to return to normal operations as quickly as possible, we now face a substantial likelihood of hybrid office and remote working arrangements. As a result, one of the broader long-term conclusions from the pandemic is the recognition of a new superpower— the ability to readjust to circumstances seamlessly.

In fact, from our point of view as a loan agent, this superpower has always mattered. Flexibility is an essential capability, from broadly syndicated deals with hundreds of lenders to club deals with a small handful of highly engaged private lenders. Just as during the pandemic, loan agency teams must adjust to complex and unique situations. The needs of a diverse set of stakeholders in the loan—from mechanics surrounding closing and funding and ad hoc upsizing of facilities to trading on the loan during its lifecycle—vary from deal to deal and often change ad hoc as circumstances arise.

How does scale enter the equation? We believe that when scale and size are seen as synonymous, loan solutions can become rigid, taking an assembly-line approach that does not necessarily flex to circumstances or take account of the big picture. For example, when highly specialized teams complete discrete tasks and hand them off to other groups, the linkages between teams can break under stressors, be they major global upheavals or more minor operational glitches such as failed trades. Similarly, when it is assumed that smaller teams can handle unique scenarios with more flexibility, there can be gaps in processes and controls that can result in longer-term risks and challenges for stakeholders in the loan.

The Components of a Loan Agency Solution

Thinking about the four components of a loan agency solution and how they work together brings more nuance to the topic of scale. They are infrastructure, experience, relationship management, and process and controls. Arrangers and lenders should consider each of these factors in choosing the right service provider for their needs.

Infrastructure includes core technologies that enable loan management and servicing across a wide range of commercial loan types throughout a loan’s lifecycle from origination to trading and settlement. Such a loan system provides the operational core for a loan agent’s activities.

Infrastructure also includes additional systems that support loans. Examples include a secure virtual data room for storing and distributing loan documents, loan amendment software to help smooth interactions with the lender syndicate if loan agreement terms change, and self-service tools including portals and Application Programming Interfaces (APIs)[1] for lenders to access loan information. An additional component would be a trade settlement platform to facilitate buying and selling around a loan that provides workflows and automation to help streamline the settlement lifecycle.

Experience also plays a central role. Technology can certainly help manage risk and lower error rates, but it still takes human expertise to address unexpected circumstances and exceptions, particularly in distressed and default scenarios. There are two scenarios: loan-based and task-based.

A loan-based team knows a particular loan or deal inside and out but may have more of a generalist orientation. When unexpected issues around assignments, trades, or other tasks arise, such teams may struggle or have to enlist other resources who have dealt with similar situations in the past. By contrast, a task-based team will focus on pieces of the loan lifecycle, such as closings or rate resets. While they have much more extensive technical expertise in their area, they often remain at a distance from the details of a loan. As a result, they may be unfamiliar with the specifics of a loan agreement that could affect how they complete tasks related to that loan.

Deep task-based expertise, integrated with knowledge of specific loan terms and stakeholder needs, matters more to clients than the way teams are structured on an organizational chart. Finding a middle ground delivers the best of both worlds. In other words, it is important to examine the way an agent coordinates and integrates its capabilities. Beyond the scope of individual tasks, clients benefit from loan agency staff who have a breadth of experience with different loan types and lending scenarios and who understand both “up” and “down” market cycles.

Robust infrastructure supports that integration. A highly engaged and collaborative relationship management model also helps preserve continuity from promises made during the sales cycle to the ongoing delivery of loan services. First, when structured properly, this model creates a single point of contact for clients. Second, it provides consistency and context as specialist teams with processing responsibilities execute on client needs and requirements set out in the loan agreement.

Finally, processes and controls provide a structure that helps manage risk and minimize potential issues. Loan agency covers a host of activities from financial transactions, trades, settlements, and reconciliations to administrative tasks such as processing borrower and lender data, requests, or consents to amendments. Safety and soundness are critical. As regulated and audited entities, banks must meet a higher bar when handling these loan-related transactions and activities, especially in areas such as wire fraud mitigation and collateral reporting. Fulfilling client requirements also requires in-depth understanding not only of the best practices but also of the loan agreement and syndicate structure.

From Scale to Flex

One consistent theme here is that scale has more to do with capability than size. Scale is something that loan agents do rather than something they have. Even a smaller team can demonstrate scale when pulling together their in-depth task expertise, knowledge of a loan, and ability to adjust to changing circumstances, to deliver consistent client service and an excellent client experience.

Technical innovations around data delivery and access or workflow and automation tend to attract much of the attention paid to “what’s new” in loan agency solutions. However, it is important to point out that robust technology infrastructure also creates room for human talent, more connection to client needs, more flexibility in adjusting to circumstances outside of the use cases enabled by technology. Our colleagues Richard Britt, Josh Stowell, and Bobby Weil wrote extensively about keeping the focus on people earlier this year in the context of loan reporting. A similar principle applies to loan agent servicing.

As a result, the word “scale” could even be a bit misleading. We find that clients are ultimately looking for “flex” rather than any one element of infrastructure alone. Although loan agents across the industry have strengths, clients and other stakeholders in a lending facility see better outcomes when a loan agent brings flex to the table. While COVID-19 shined a spotlight on this nuance, broader changes in the loan markets also reinforce the point—from LIBOR cessation to the increase in direct lending to wire fraud risks to the potential for a greater rate of default and distress as governments scale back stimulus programs.

Conclusion

On fair balance, no one has developed a perfect mousetrap, although many loan agents, including Wilmington Trust, continue to innovate in technology, talent development, and process improvement. Situational intelligence still wins the day. While size can offer some advantages in some scenarios, it does not fit every need or provide the comfort level needed for every circumstance.

Instead, loan agents must offer an additional factor to deliver value to clients, which we have described as “flex.” Flex allows a loan agent to adjust to the size and structure of any credit facility. It also provides the right environment for controlled innovations that deliver a superior client experience at every stage of a facility’s lifecycle. Regardless of the service provider they select, loan agency clients should make sure to avoid the scale trap by asking prospective partners tough questions about their ability to deliver “flex” in an ever-changing market.

[1] In simple terms, APIs are software components that help two separate applications share data or use each other’s functionality.


Disclosures

Wilmington Trust’s domestic and international affiliates provide trust and agency services associated with restructurings and supporting companies through distressed situations.

This article is intended to provide general information only and is not intended to provide specific investment, legal, tax, or accounting advice for any individual. Before acting on any information included in this article, you should consult with your professional adviser or attorney. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, or the opinions of professionals in other business areas of Wilmington Trust or M&T Bank.  M&T Bank and Wilmington Trust have established information barriers between their various business groups.

Wilmington Trust is a registered service mark. M&T Bank Corporation’s European subsidiaries (Wilmington Trust (UK) Limited, Wilmington Trust (London) Limited, Wilmington Trust SP Services (London) Limited, Wilmington Trust SP Services (Dublin) Limited, Wilmington Trust SP Services (Frankfurt) GmbH, and Wilmington Trust SAS) provide international corporate and institutional services. M&T Bank Corporation’s US subsidiaries [Wilmington Trust Company (operating in Delaware only) Wilmington Trust, N.A., M&T Bank, and certain other US affiliates provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management, and other services. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Not all services are available in all jurisdictions.