Should Alternative Lenders Be Loan Agents?

While banks have traditionally arranged syndicated loans and served as the loan agent, non-bank lenders (alternative lenders) began arranging syndicated loans when the alternative lending space grew following the 2008 financial crisis. Some alternative lenders choose to act as the loan agent on credit facilities they arrange, given the influence and control associated with being the head of a syndicated loan and the accretion to brand value. But this isn’t the only path forward. In this paper, we will review why many alternative lenders are better off hiring a third party to be the loan agent and how they are finding efficiencies that help build their reputation as a lender by outsourcing administrative agent and collateral agent services on their loan portfolios.

Loan Agency Is Typically Not a Focus for Alternative Lenders

Alternative lenders tend to concentrate on advancing new loans, managing their existing loan portfolio, and dealing with distressed loans. They are typically experts in evaluating the likelihood of a borrower defaulting on a loan, reviewing a borrower's financial data, and understanding the economics that underpin a loan. Alternative lenders are usually laser-focused on lending.
This focus generally does not extend to the day-to-day administration of a loan. Most alternative lenders have limited back-office capabilities, and they do not provide borrowers with a comprehensive set of banking services. They tend to specialize in areas where they can provide added value compared to a traditional lender, but this does not include the back-office and middle-office functions that are critical components of being a loan agent. These can include managing interest, principal, and fee payments; processing assignments; sending payment and rate setting notices; setting interest rates, and more.

"Most alternative lenders have limited back-office capabilities.”

As a result, acting as an administrative agent or collateral agent is ordinarily not a core competency of alternative lenders, and it is easy to underestimate the resources needed to properly perform the role of a loan agent. This role requires additional resources and different expertise than what a lender typically needs to manage its position in the loan. The loan agent’s responsibilities are not glamorous, but it is important they are handled in a correct and timely manner.

Alternative Lenders Often Lack the Necessary Systems and Infrastructure

A loan agent typically needs a specialized internal infrastructure to properly agent a loan portfolio. A loan agent’s responsibilities include maintaining the register, calculating and distributing payments, collecting compliance information, and storing collateral. Failure to develop a robust internal infrastructure to support these functions can often lead to costly errors, unnecessary delays, and reputational damage.

The loan agent generally needs a loan software system as well as established workflows and procedures to accurately administer the loan. They also typically need experienced staff versed in the role of a loan agent who perform such tasks as responding to lender and borrower inquiries, making and tracking payments, and managing the back-office and middle-office functions referenced above. These functions can be time consuming—especially on complicated loans—and shift focus away from more strategic needs of an alternative lender’s business. In many cases, the role of the loan agent cannot be sufficiently supported by existing staff as an extension of responsibilities from their core job functions. Asking staff who have other roles to also handle the loan agent functions can often distract them from their core job functions and risks the responsibilities of the loan agent not getting the necessary attention.

The Desire for Control and Brand Recognition

Some alternative lenders choose to act as a loan agent because they are concerned with exercising control over the credit facility, or they want the brand recognition that historically accompanied being the loan agent. An alternative lender can solve these objectives while avoiding the risks and distractions of performing the agency roles.

The most important step to ensure appropriate lender control over a credit facility is to exercise diligence in selecting a third-party loan agent. Since a third-party loan agent does not have an economic interest in the credit facility, they should seek and follow lender direction in the event any exercise of discretion is needed. Hiring a loan agent who understands this dynamic is critical. Any additional restrictions the lenders desire can be incorporated into the loan documentation.

Historically, loans were both arranged and managed by an administrative agent. This isn’t always the case now. It is possible to decouple the roles, such that the “arranger” maintains the locus of control and brand recognition while shifting the fundamental administrative duties to a loan agent. An alternative lender can often gain brand recognition by being identified in the loan documentation as the arranger, which can result in heightened brand awareness for the alternative lender. Another possible solution is to identify the alternative lender as the administrative agent in the loan documentation and create another agent role—such as a paying agent or registrar—to address the routine but necessary functions that the alternative lender is not interested in performing.

The Sub-Agent Option

Alternative lenders that want to avoid the administrative burdens of serving as a loan agent but still want to be identified as the agent and handle some agency functions may be best served by hiring a third-party to serve as a sub-agent. The lender can then delegate to the sub-agent those mechanical and administrative tasks the lender desires to offload. The specific agent functions to be assigned to the sub-agent will vary depending on the desires of the lender but are generally responsibilities such as maintaining the register, setting interest rates, and distributing payments.

Outsourcing: A Better Approach to Loan Agency

Alternative lenders have increasingly found that outsourcing the loan agent role to a third-party provider helps them stay focused on their core business. Since the cost of hiring a loan agent is paid by the borrower, alternative lenders can outsource the loan agent role without incurring any out-of-pocket expenses. A proficient and professional loan agent can ensure proper loan tracking, administration, and reinforce a positive brand reputation.

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