Diamonds Are Made Under Pressure
Many economists are concerned about a potential US recession in the near future, and BlackRock even called the prospect of a recession “foretold” in their 2023 Global Outlook. A recent survey from The Conference Board found that 98% of CEOs surveyed are preparing for a US recession within the next twelve to eighteen months. The percentage of CEOs preparing for an EU recession in the same timeframe is even higher at 99%. Yet, diamonds are made under pressure. The same is true of the business world. Just take a look at Netflix and Blockbuster. According to Sebastian Mallaby’s book The Power Law: Venture Capital and the Making of the New Future, Silicon Valley’s most bracing creed is “the belief that most social problems can be ameliorated by technological solutions if only inventors can be goaded to be sufficiently ambitious”. While recessions can be tough on businesses and individuals, they also create opportunities for positive disruption in inefficient industries and markets.
A 2001 study conducted by Perdue University during the “Dot-com Boom” found that adding “Internet”, “.com”, or “.net” to a company’s ticker name resulted in an average stock price increase of 74% over the five-day intervals preceding and following the announcement. Although Pets.com is a relic of ancient history it serves as a reminder that recessions weed out weak business models. In an economic downturn, companies must pivot their business models to survive and grow. Poor economic times cause us to strive for innovation, which creates new opportunities and trends. After the Dot-com bubble burst, the underlying technology of the internet was improved upon and still has a substantial presence in our lives today.
What’s more, the Great Recession also gave rise to the 21st Century Gig Economy, which has completely changed how many people work and earn a living. Prime examples of this are Uber and Airbnb which were created in the aftermath of the 2008 global economic crisis and disrupted existing business models. The near-monopolies of taxi services and multinational hotel chains were suddenly competing with the everyman trying to earn an extra bit of cash on the side.
Like Yellow Cabs and Hilton before it, financial technology has also been subject to insurgent competitors. The rise of these innovations was always inevitable; a prophesized arrival heralded by looming financial uncertainty. Since the Financial Crisis, the market for Leveraged Loans and High-Yield Debt has grown nearly 130% to over $3 Trillion, more than twice the rate of GDP which only increased by 57%. Leveraged loans are typically used by companies with large amounts of debt, or those who are considered high-risk borrowers.
In 2016 the SEC declared that the 19.3-day average settlement time for leveraged loans in 2015 was unacceptable with then SEC Chair Mary Jo White opining “Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds,”. However, the average settlement time for distressed loans in 2018 more than tripled from an average of 19.3 days to T+67 days and in June 2021 the LSTA reported that the average par trade settlement time reached a seven-year high of T+23 days.
SOURCE: LSTA
Forest Park is the latest phoenix to rise from the ruins of the old; bringing much-needed innovation and efficiency to the illiquid leveraged loan market. Forest Park’s Parlake software aims to provide a more efficient way for investors to trade leveraged loans through its online platform. Parlake offers lower fees than traditional investment banks, support for primary allocations, seamless trade file sharing, automated allocation checks, and transparency around pricing data. In addition, Parlake will allow investors to trade directly with each other rather than having to go through an intermediary.
The bond market allows investors to trade instantaneously, receiving securities almost immediately upon entering payment information. This is an example of Delivery versus Payment (DVP). In a DVP trade, Custodians receive all of their trade activity and vice versa. They know what is being settled on a particular day as well as cash matches and reconciliations. Custodians can match to a counterparty if something is off (a manual, not automated, process for the latter).
This is opposed to Non-DVP, the sort of trade that Parlake allows. A Non-DVP trade is a type of financial transaction where the trade is not completed until payment has been made. This type of trade is usually done between two parties that trust each other and is not cleared through a third party. Due to the unique nature of the syndicated loan process, DVP trading is not the model that is optimum for the given transaction since the two parties are often in net positions with each other. Therefore it is more efficient, for both parties and the market as a whole, for a movement to be across multiple trades as opposed to a singular payment. Non-DVP trading allows for the most optimal trade scenarios to occur, which would not be able to occur in a DVP trading scenario. The existing regulations in the market provide the additional bonus of data governance through Parlake’s Blockchain with new safeguards for non-DVP trades while strengthening existing ones.
Older and outdated systems such as ClearPar, which rely on the DVP model, use distant “clearinghouse”-like service providers to process transactions. As a result, settlement times are increased because more human actors are involved in the transaction. For decades, these systems have been dangling the carrot of efficiency in front of end users. With Parlake, the “obfuscation house” is removed thanks to the underlying technology that creates a consensus between the two parties.
There are undoubtedly many nuances in the syndicated loan market, enough to make it seem arcane and inaccessible to the layman. Could technology truly change a market so mired in manual processes? Most commonly believe that the food on our table comes from the Luddite pastoral world of Farmer Brown–a process that has remained unchanged since the Stone Age. This could not be further from the truth. Technology can be used to expedite seemingly un-technological problems. GPS location, spatial intelligence, machine-to-machine communication, computer vision–these are the words on the lips of America’s Breadbasket. Increasingly common in every field are the innovations of the future, granting farmers more time to be productive elsewhere.
In the trenches of tomorrow’s syndicated loan market, as in the barnyard, there is a brand-new tractor rolling in. Parlake utilizes Blockchain technology granting operational resilience through consensus, approximate string matching searches, trade optimization, and a modern interface. Parlake is designed to ensure that all parties will receive their cut, despite pressure in the market, to clearly shine above par.
