The credit middle office: navigating complexity in a competitive market

Credit markets have changed profoundly since the 2008 fiscal crisis, with broadly syndicated loans (BSLs) and private credit replacing bank lending as primary sources of debt for corporate and private equity. 

As banks tapped down lending activity in the aftermath of the 2008 credit crunch to focus on repairing balance sheets, BSL markets and successively private credit managers stepped in to fill the gap and have not looked back.  

According to Preqin figures private debt assets under management (AUM) have increased more than four-fold during the last decade, and currently sit at approximately US$1.6 trillion. Leveraged loan markets in the US and Europe, meanwhile, have seen loan issuance more than double since 2015 to exceed US$1 trillion in the first half of 2024, according to figures compiled by law firm White & Case.  

As private credit and BSL markets have grown, so has competition, and to differentiate their propositions, lenders and private credit investors have adopted more sophisticated and complex credit strategies. 

Previously private credit and BSL would focus on servicing different borrower groups, but as strategies have evolved, head-to-head competition for the same deal opportunities has intensified. Pitchbook figures, for example, show that US companies refinanced more than US$13 billion of private debt in the BSL market during the first four months of 2024, a 180-degree flip from the second half of 2023, when most borrowers were refinancing BSL borrowings with private debt.  

Market evolution drives middle office transformation

As competition across credit markets has ramped up, lenders have had to reappraise their middle office operational and technology infrastructure and ensure that the administration of the individual credits in their portfolios is efficient, accurate, and as frictionless as possible for borrowers and other key stakeholders. 

In a crowded market, where borrowers have a wide pool of lenders to choose from, a reputation for best-in-class middle office service – including tasks such as loan accounting, loan agency, trade settlements, interest rate payments, borrower and lender communications and borrowing bases – can serve as a point of differentiation for companies and sponsors when selecting a credit partner. 

The last 24 months of dislocation across credit markets have served to further emphasize just how valuable and important middle office capability has become for credit managers. 

As interest rates have climbed, so have the costs of floating rate debt structures, which have added to the workloads of credit middle offices, which have in turn had to keep track of agency notices, rate resets and margin changes. Covenant compliance and loan amendment negotiations have also increased in volume as financing costs have climbed, directing further demands into middle office in-trays. 

Managers and lenders that had been able to get through with lean middle office operations in bull-markets have had to reengineer middle office operations to keep up with the higher volumes of increasingly complex and important loan administration workloads. 

Middle office support

Instead of hiring in much larger middle office teams and locking up cash in capital expenditure to keep pace with rising middle office workloads, credit providers can take advantage of the technical and technological expertise of an outsourcing partner to put in place a middle office model that is flexible and scalable. 

Alter Domus, for example, has supported credit provider clients with comprehensive loan servicing and monitoring support for more than two decades, and has built up the specialized expertise and technology stack to cover the ever-intensifying technological and operational asks of middle-office credit teams.  

All aspects of loan servicing needs can be handled by Alter Domus across our middle office service offerings: 

• Our Loan Agency offerings via our Agency Services team allows us to serve in a variety of agency roles including named administrative agent, sub agent, successor agent, and more. In doing so, our teams handle jobs including counterparty communication, oversight of covenant compliance, and agency notices. 

• Our Loan Services offerings provide an array of coverage including loan accounting, loan servicing, trade settlements, and CLO services. Our teams are perfectly positioned to take care of complex, time-consuming day-to-day workflows that are essential to the life of a loan. 

• Our Loan Monitoring solutions provide digitized, normalized financial information from borrowers delivered to your monitoring solution of choice or our modern portal.  

Our middle office servicing relies heavily on our proprietary administration platforms CorTrade, Agency360, Solvas, and VBO to support clients across a broad suite of accounting, modelling, and credit risk solutions. Alter Domus’ tech platform covers all these tasks, and others, with an interface that can operate within a client’s portfolio management system and process a wide range of reporting, data, and internal accounting functions. 

When reviewing middle office infrastructure capability, it is also crucial for managers to ensure that the middle office links in to both the front and back office, and that teams in these three functions are not operating in siloes. 

Each team will often use different systems, technology platforms and servicing teams to execute their core functions, but it is important that all functions are integrated, and that there is a secure, accurate data trail that can be traced from the beginning to the end of the loan lifecycle. 

Our firm has leveraged our credit and technology expertise to help several credit providers build data bridges between the technology and software used in separate functions, and integrate data from preferred front-office, middle-office, and back-office platforms to ensure data veracity. 

Working with a partner like Alter Domus enables credit providers to focus on their core business of originating opportunities, assessing risk, and underwriting new financings, confident in the knowledge that they have the middle office support in place to manage loan servicing tasks to the highest industry standards.