CLO Trading Startup Is Now Allowing Investors to Cut Out Banks

(Bloomberg) – An online platform is now allowing money managers to trade collateralized loan obligations directly with one another, without banks standing in between.

KopenTech, a firm that provides CLO refinancing, data analytics, and electronic trading services, has launched direct trading among investors, according to a statement seen by Bloomberg. The platform saw its first trade between two investors last Thursday, Jill Scalisi, chief engagement officer, said in an interview.

The roughly $ 1 trillion CLO market, where leveraged loans are bundled into bonds, has for years remained largely manual. To sell a CLO, investors often solicit bids through multiple banks, which act as broker-dealers and try to find buyers for the debt. This process is often tracked manually and arranged through a combination of instant message chats, emails, or phone calls.

“CLO trading has been done the same way for the last 20 years, and client-to-client trading has never happened before,” Scalisi said. “Now we are using technology to bring the CLO market into the 2.0 space.”

KopenTech’s KTX DirectBidding, a new feature on its trading platform, will likely compete with Octaura Holdings, an upcoming electronic trading platform for syndicated loans and CLOs recently formed by a group of seven banks, such as Citigroup Inc. and Bank of America Corp, along with Moody’s Corp.’s Moody’s Analytics. Octaura plans to debut the venue for loans first with the one for CLOs to follow, and ultimately hopes to expand to other credit market products, Bloomberg reported last week.

Investors have already been able to use the KopenTech platform to sell CLOs, with 15 broker-dealers on the platform participating in transactions. Now, investors have the ability to allow the potentially more than 150 other institutional buyside accounts on KopenTech to bid directly on the sale, Scalisi said.

The process is anonymous and can be completed in under two hours, and the seller can choose the time-frame, Scalisi said. If the transaction ends up being between two investors, then a subsidiary of KopenTech that is a broker-dealer acts as the settlement agent, instead of a bank doing so.

In early 2020, KopenTech launched an online auction process to allow some CLOs to cheaply refinance their obligations. While CLOs must have a provision in their documentation known as an applicable margin reset to use that auction process, the new DirectBidding feature does not need any special provisions in documentation, Scalisi said.

The bidders also receive automated feedback on where their bid stands compared to others – for example, if their bid is the highest, or if it is not even in the top three, Scalisi said.

Signing up for the platform is free, and traders pay fees on individual transactions. Scalisi declined to discuss the fees, but said she expects them to be cheaper than current market standards.

© 2022 Bloomberg LP

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