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Counterparty exposure: When your LPs call can you afford not to have the answer?

It’s been a terrible day in financial markets, however 3 bank stocks in Europe have fared worst than most: SocGen (-13%), UniCredit (-13%) and RBI in Austria (-25%). This sell off represents a 2x underperformance versus their peers. Why? You guessed it – exposure to financial institutions in Ukraine and Russia.

Counterparty risk has suddenly reared its ugly head again. Uncertainty and chatter around margin calls, fund blow ups and rating downgrades may well follow. While not on the same scale, this echos of the fallout we saw from the Greek banking crisis in 2012 and its knock-on effects for counterparty risk in European banks.

One thing is certain though, every fund manager and private equity sponsor will be getting the same emails/calls today from investors. Can you quantify your exposure to this crisis? 

Data aggregation across multiple loan agents is one of the biggest challenges private equity sponsors face when reporting risk data to LPs.

Why does this matter to the loan market? Well unless you are in a bilateral deal, the success of the companies you lend to depends on their access to capital. The lending market is so interconnected, it can ill afford a break in the chain anywhere.

As an investor, CEO or Private Equity sponsor, knowing who is in your lending syndicate so you can be sure of your access to capital is essential. If one of the institutions in your lending syndicate is no longer able to provide financing when you need it you have a big problem.

That problem is loans traded in the secondary market take on average 74 days to settle. Meaning the view you have now of your lenders could be almost 3 months out of date.

If you are a Private Equity sponsor and you have multiple loan administration firms managing your debt, even this stale information can sometimes take up to 3 weeks to collate from the underlying agents.

This means if events in Global Markets move swiftly like they have in the Ukraine, then you are unlikely to have an accurate representation of the counterparty risk at an individual company or portfolio level. Managing risk and hedging becomes guesswork. Streamlining this reporting is essential.

LedgerComm provides agency software that allows you to aggregate your risk across all your debt administrators instantly, allowing bank and independent agents to report upto date information on 1 platform.

For a more connected, digital way to manage your risk, connect with us