Two very different debt capital markets deals – one recently completed in Asia, the other earlier this summer in Europe – show how new financial technology is set to transform the primary markets. That is slowly, methodically and by concentrating on the pain points in the process, rather than on grand visions of re-inventing the ways in which lenders allocate funding to borrowers.
Both deals were small private placements. The most recent was a HK$100 million ($12.5 million) certificate of deposit (CD) issued by the Hong Kong branch of China Construction Bank with Crédit Agricole CIB as the dealer.
This was the first CD to be issued digitally with all documentation automatically and electronically generated. The entire issuance was managed on Origin, a digital platform that connects frequent borrowers and dealers in the debt markets.
Origin is more renowned as the provider of a market place for regular issuers of private placements off European medium-term note programmes – supranationals, quasi sovereigns, agencies and banks – to display indicated terms that they are prepared to pay at various maturities to dealers who then sound out investors willing to lend.
This marketplace now connects 20 of the biggest bank dealers and more than 80 issuers of private placements, and in the first 10 months of this year was the place where $20 billion-worth of new issues first came together.
But creating such a market place was always and only the first step for Origin on a longer journey.
Discovery to execution
Some 15 months ago, Raja Palaniappan, chief executive of Origin, first outlined to Euromoney plans to move beyond pre-trade price discovery into digital deal execution, with a capability to generate the documentation underlying each new issue from an initial term sheet then progressing to final terms and a legal document acceptable to issuing and paying agents and to clearing and settlement systems.
Every new issue is a legal contract. The vision was to reduce inefficient, error-prone and time-consuming manual preparation of such documents. No more PDFs being emailed between dealers and issuers; no more repeat in-putting of terms; no more printed documents and signatures in ink.
Origin had learned from both dealers and issuers that this middle-office part of the new-issue process was highly inefficient and so developed and tested a new approach with customers from both camps.
Success comes from identifying the actual problems customers have and developing the best, simplest and most scalable solution- Raja Palaniappan, Origin
This sees it now allow access through application programme interfaces (APIs) to generic indicated term sheets, then with automated input of key agreed final terms into actual deal documents.
Lawyers for issuers and dealers can confirm these in minutes rather than hours – or even days in some cases – when mistakes creep in during the manual transposition of terms into final legal drafts that then have to be corrected and rechecked,
Even when working on something that market participants were crying out for, adoption still took a year.
At the end of July, Swedish property company Vasakronan issued an A$30 million ($20.35 million) green bond, the first digitally issued MTN on the Origin platform. Citi was both dealer and issuing and paying agent. Using the Origin platform, Citi and Vasakronan were able to fully automate documentation and communication flows.
It may have been a small deal, but it was important.
Marcus Austin, head of product development at Citi Issuer Services said in July: “This is a ground-breaking transaction. A fully automated work flow, documentation and settlement process represent the future for our industry in terms of costs and efficiency.”
Palaniappan adds now: “Vasakronan has said that a week after this deal, it did another transaction with a different counterparty that required five drafts before the final documents were correct, which took two or three days.”
Adding features to workflow
Palaniappan reflects on this breakthrough. He tells Euromoney: “We are a small startup in a big industry – capital markets – but we have learned a couple of things. First, developing technology is not the crux of the problem. There is a lot of good technology. The key is getting it adopted. That’s why we did not start out as a blockchain company, for example.
"Success does not come from saying: ‘Here’s some cool new technology, I wonder where we can apply it?’ Rather it comes from identifying the actual problems customers have and developing the best, simplest and most scalable solution."
He adds: “We have a network of customers – issuers and dealers – and some of the most engaged were very hands on in designing this technology and the whole user experience to make it fit for purpose. Citi, for example, had a double interest, both as a dealer and as an issuing and paying agent.
"And this is not a standalone proof of concept. Rather, now as we come to commercialize it, we are deploying it within an existing network and marketplace that we have already constructed. It will feel to users like we are simply adding another feature that fits within their existing workflow.”
There was no requirement to sign up to a private blockchain, for example, as there was for investors seeking allocations on the World Bank’s breakthrough bond on distributed ledgers in July 2018.
Origin has specifically targeted the deployment of digital technology to high-volume, low-margin parts of the primary debt market that are overburdened with manual processes. Its engagement with dealer banks in Asia, intermediating European and global borrowers selling to Asian credit investors, led it to the Asian bank CD market.
Benjamin Lamberg, global head of MTNs and private placements at Crédit Agricole CIB, says: “The Asian debt markets are perfectly placed to take advantage of this technology.
"The funding markets are skewed towards short-term financing, with borrowers issuing and refinancing much more frequently than you would typically see in Europe or the US – transaction volumes can be 10 times higher.
"Despite this, the documentation process is incredibly manual, with multiple term sheets and final terms manually drafted and emailed to different parties.”
Digitalization of workflow processes is a hot topic for issuers and banks across the debt capital markets. The obvious question is whether or not Origin could present its solution to issuers and bookrunners of larger, public bond deals.
Palaniappan says: “The supranational, agency and financial institution borrowers that already use our platform use the same underlying prospectus and final term-sheet documentation for $1 billion syndicated deals that they do for $50 million private placements.
"Right now, our workflow tool has one dealer automating the drafting of final documents, but we can easily amend that to allow one dealer to draft and then share documentation with two or three other lead banks in a syndicate.”
A lot of startups have raised funding to bring new technology to the vast debt capital market: some are working on automated bookbuilding, allocation and investor access; others on tokenization. Banks are innovating too.
Origin has sought to self-fund the development of its digital documentation offering from the revenues generated by its marketplace connecting issuers and dealer banks.
Crunchbase records just $2.2 million in funding raised in seed rounds, the last being three years ago. Issuers and dealers will pay a fee for this documentation service, but how that is calculated and levied is still a topic under discussion. Now, as it seeks to scale up adoption, Origin is in fund-raising mode once more.
“As with all startups, we have lots of conversations with potential investors and we have turned down a number of funding opportunities that were not right for the business,” says Palaniappan. “But we are now negotiating a strategic funding round.”
He says: “What I’d most like is for the business team to be able to clone three versions of ourselves.”
And what is the long-term vision for Origin?
“We have plenty of wood to chop right now, connecting up more issuers and dealers then paying agents, clearing systems and stock exchanges,” Palaniappan says.
“There is just one set of participants – end investors – that are not yet part of the Origin community. And while investors will always face off with bank dealers, who have balance sheet, know-your-customer systems and regulatory licences, we might eventually, over the medium term, ease the flow of information and the workflow between issuers, dealers and investors.