Fireside Chat with Citco Loan Services

5 June 2024 - In a Fireside Chat with Michael Peterson, Managing Director of Citco Capital Solutions Inc. and Elaine Furnari, Senior Executive Vice President, Citco Loan Services (USA), Inc., the pair sit down to discuss the ins and outs of the Citco Loan Services offering, including why it is unique in the space, an insight into asset classes across the debt market sphere, how Citco’s technology sets it apart from peers, as well as the market state of play.

• An introduction to Citco Loan Services

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  Michael Peterson: Since 2016, private credit has more than doubled and is already a $1.5 trillion business versus $1.6 trillion or so in the traditional Broadly Syndicated Loan (BSL) world. In short, private credit is outpacing the traditional investment bank originated debt market.

  It is an unprecedented time and I imagine you are at the forefront of witnessing this development – but before we go into discussing the market state of play, let’s start with asking what effectively is Citco Loan Services?

  Elaine Furnari: Citco Loan Services was born out of the fund administration platform of the Citco group of companies (Citco) whereby we had clients who were looking for a partner that fundamentally understood them, who understood what they were looking for out of their loan origination platforms.
  
  The more specialized loan products were becoming, the more realization there was that providers were not meeting needs – ultimately there was a widespread sentiment that current partnerships were relatively inefficient, with some clients having to interact with multiple providers to deliver what was needed. So, we began making internal developments five to 10 years ago, building the business with a foundation that has a proper level of support in terms of both technology and expertise.

  We built a team of professionals with 20 plus years of experience – collectively, our team has over 100 years of experience across the ecosystem and across multiple platform options. This breadth of expertise is important because we are now in a space where the industry is much more complex – we have private credit, broad credit, loan origination, credit servicing, etc. And whilst many shops in the industry have established systems, the more complex structures become, the less able they are to meet demands.

  Michael Peterson: Let's talk about that for a second.

  Because that's actually an interesting development. Private credit is booming and we are now seeing that banks are stepping into this space to essentially get away from the ‘cookie cutter’ molds of the traditional bread and butter syndicated loans – but this presents challenges.

  If you could provide an overview of the type of clients you currently service, how you handle that from a tech offering stand point, and from an expertise point – as ultimately, these deals that are not typical BSL.

  Elaine Furnari: To be honest, our client base is extremely broad. While I would say we do get a few leads from the debt funds and private credit funds – what is interesting is that we're doing overflow work for banks.

  Citco Loan Services works with insurance companies, clients that are looking to break into different asset classes or different security types. We work with plain vanilla financial companies that have a balance sheet, but we also have a series of fun clients – aka non-bank lenders – who need a partner that appreciates what their reporting needs are, what their structuring needs are as well as the complexity of their portfolios.

  All in all, probably 50% of our portfolio are actually non-fund lenders, which surprises people as Citco is one the largest asset servicers in the alternative investment industry.

• Why Citco’s offering sets it apart from peers

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  Michael Peterson: Citco Loan Services’ client base has really evolved as private credit has evolved – you have banks, you have insurance companies, you have specialty finance vehicles and funds –, and are effectively the entire ecosystem globally, which is a very unique proposition.

  Before we go into asset classes, let’s talk about the tech stack and the people, because when it comes to different asset classes, one size does not fit all.

  Everyone knows loan servicing and agency works with tech that is roughly 50 to 60 years old, 70 in some cases – so how did Citco approach the technology and the staffing aspect?

  Elaine Furnari: The older tech on the market is nicely geared towards your simple Government-Sponsored Enterprise type lending, so the IT is fit for purpose when it comes to traditional government securitization.

  But once you start to get into some of the more esoteric fee calculations whereby you have any variety of flavor, you're always running up against manipulating something in systems that is backed up by something as basic as an outlook email account invite.

  It seems crazy, but I've used that structure more than once in my past life and so have my team – however, when you lose an email, an invite, misplace a document, you find things go wrong.

  So, when Citco Loan Services built the systems, we took everything that was painful that we could remember and hadn’t blocked out, and we sat down with a series of technology vendors and talked to some very well-known people in the space to present our challenges and what we were looking for.

  We went through a very arduous year – plus a long design period – which resulted in a 500-page Business Requirement Document (BRD). Over my 30 plus years of experience, I’ve implemented various technology systems, but I've never partnered with a technology vendor in such depth.

  We ended up with a very robust platform that is absolutely fit for purpose. But more importantly, Citco Loan Services can enhance and build this platform as our clients’ demands evolve and technology processes develop – so it is a unique platform and one that differentiates us from our peers.

  This is a platform whereby we truly looked at industry and client pain points, and addressed each one – that said, of course, we're not going to be able to get every last thing in the system perfect, but we can certainly ensure that we get the majority accurate. We have now been using this system for a few years and I can say that it handles the most complex of scenarios.

  Michael Peterson; So what you're saying is Citco tech is a little bit outside of the traditional framework? You still have other technology packages to support you for what's called ‘plain vanilla instruments’, but then you have other in-house tech.

  That's how you effectively approached it?

  Elaine Furnari: Correct, and our technology ecosystem is flexible enough that if we do find that we have a gap, we have complementary technology that keeps us out of anything that's decentralized. So the goal is if it doesn't fit in our system, it still needs to be centralized.

• An insight into asset classes across the debt market

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  Michael Peterson: Let's take that down a little, because your clients are loan originators, that's what they do. They originate loans in a variety of asset classes, so could you do us a favor and talk a little about the types of asset classes you cover and what your clients are actually doing?

  Elaine Furnari: When we look at asset classes across our client base, we see a lot of that is general corporate finance – Commercial Real Estate (CRE), involving term loans and construction loans, bridge loans etc. – across those asset classes, as the nature of the game revolves around a lot of specialty finance, including venture debt, real asset and infrastructure debt – for example, aircraft fund lending. In short, we have clients across all aspects of asset classes, as well as a fund finance portfolio.

  And we're supporting that either through servicing – direct servicing this is, where it's a bilateral transaction or white label, and the client wants to remain the named agent – and we can support them in the background, we can be their designated sub-servicer.
  
  Michael Peterson: On these deals, whether it's CRE, mid-market, warehouse, securitization, a debt fund bank, insurance company – let’s talk about syndications.

  You said some of your client portfolios consist of revolving loans, some are probably delayed-draw term loans, some are probably just term loans, but are these bilaterals or do you have large syndicate participants – what does that look like?

  Elaine Furnari: Most of the portfolios are syndicated, and we find that for the most part our clients are looking to keep some of those syndications relatively small – perhaps three to four participants in one deal, but we do have clients who have participated in some of these loans with 50 plus participants.

  And what we'll see is maybe that they're participating a loan out to another client, which is always a nice synergy. But we also work with club deals – which is more exclusive than a syndicate as it integrates a sense of closed business familiarity, normally between three to four participants.

  Michael Peterson: So, anything from club deals to BSL type syndications, what about geography? Because if your clients are across the banks, insurance companies, asset managers, is this just a North America kind of footprint or can you handle this as these guys invest globally – what does that look like?

  Elaine Furnari: I would say 80% of our portfolio is in North America, 20% is European, and we have the rest of the world. We have clients in Germany, Luxembourg, The Netherlands, France, and then we can look as far as Australia. And we're hoping to further expand that – currently we have all of the pertinent US and North America licensing, and we leverage the Citco banks for the European and international servicing.

  We have no challenges in terms of licensing or regulations at this point in time, and we are a rated servicer, so we have a primary servicer rating from S&P in the US, we are members of LSTA and LMA, and most recently recognized as a Top 10 Loan Servicer in MBA’s Commercial/Multifamily Real Estate Mortgage Servicer Ranking.

• The market state of play

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  Michael Peterson: And then if we could pivot a little bit and get a little deeper into what are you doing – such as what are you seeing in the underlying portfolios. For example, are you handling Mezzanine (mezz) financing – a hybrid of debt and equity financing, normally used for companies to raise funds for specific projects or aid an acquisition – more than convertible or bridge loans?
  
  Elaine Furnari: Trend wise, a lot of what we are seeing is senior, but we have seen a little bit of an uptick in terms of mezz lending. What is interesting in the game of servicing is wondering what's happening with your maturities – so we have spikes in portfolio maturities for 2024 and 2025, and if you have a good client relationship, we are going to be keen to continue that.

  For this year in the current rate environment, we expect to see probably some restructuring, rather than simple extensions.

  Michael Peterson: Other than the maturity wall and higher rates, are you starting to see a lot of conversions from debt to a more preferred equity type structure – or is this not coming through with volume?
  
  Elaine Furnari: We are not seeing it yet. The team is seeing amendments kick in, but conversions in Q1 have been rare – I am surprised at this, and I think we will see an uptick in terms of lending over the next few months. The clients that we're talking to have been very vocal on the fact they have a lot of capital to deploy and they are keen to deploy that capital in the next few months.

  Michael Peterson: With interest rates settling, or at least not necessarily going up, are you still seeing a lot of forward volume and demand from our lender clients? That's interesting to see. We have got to grips with your service offering, your broad geographic and asset coverage, so why would a prospect choose you over another provider?
  
  Elaine Furnari: If you look at our typical peers there is little competition to be honest. Our biggest adversity to winning business is that clients would look to do this internally versus outsourcing – and if that is the case, we are happy to have dialogue with clients to advise on what makes sense based on certain volumes.

  If we get into what makes Citco Loan Services standout in regards to our offering, first and foremost it is our technology. We use, and our clients use, technology that's fit for purpose, and we have professionals that not only have traditional Citco environment experience – by this, experience in asset servicing – and therefore understand the requirements and the intricacies around reporting, but we also understand credit very well.

  We are taking steps in terms of ratings and from an audit perspective to make sure that our experience is dovetailed – all of which is meshing well with our operational readiness and capabilities. We make sure our offering is competitive from a pricing perspective, but we also want to make sure that our offering is competitive from a client perspective.

  For example, what do clients need to support their ecosystem? Our clients vary in respect of their creativity, their approach, whether it is from a credit perspective or a structuring perspective – so if you have a one-trick-pony servicer that is limited by experience or technology, they are not going to be able to cater to the client’s needs.

  What makes Citco Loan Services unique is our ability to understand not simply the structure of the transaction, but the client ecosystem and what is fit for purpose – this is where we really shine.