When Brian Bejile joined Citigroup's collateralized loan obligation unit 15 years ago, clients mainly placed their orders by phone.
Not much has changed, even as the market for leveraged loans bundled into bonds has ballooned to about $600 billion. When investors auction off CLOs they own to other money managers, it's still a largely manual process with the dealer that manages the sale collecting orders by phone or through chat rooms. A customer's chance of actually winning a piece of a CLO auction is usually less than 10%, Bejile said.
That's why Citigroup, the largest underwriter for the securities, is introducing an electronic platform for orders in the secondary market for CLOs. The move may transform auctions to let investors offload holdings faster. The goal is to fix a part of the market that isn't functioning as well as it could, Bejile said.
"If you look at time spent, versus the chance of actually getting what you want, it's pretty low," said Bejile, who's now a managing director working on Citigroup's loans and CLO trading platform. "It's a frustrating process for investors and what ends up happening is that bonds sometimes don't trade because buyers are fatigued."
Tough competition
The third-largest U.S. bank this month introduced the new application on Citi Velocity, the platform it uses to interact with institutional clients, for auctions known as "bid wanted in competition," or BWICs. Since then, the bank has seen its market share of traded CLO securities grow significantly, said Matt Zhang, the bank's global co-head of structured credit and securitized trading.
"We're going to change how existing and prospective investors can access, trade and analyze bonds in CLO and broader structured credit space going forward," Zhang said.
Issuance of collateralized loan obligations, bundles of loans made to junk-rated companies that get packaged into bonds of varying risk and return, has soared since the 2008 financial crisis. Investors are drawn to the fact that the securities performed relatively well during the last meltdown. Last year, sales hit a record $130 billion and have largely kept that pace into 2019.
Regulators concerned
That growth has alarmed some regulators. Federal Reserve Chairman Jerome Powell last month compared CLOs and leveraged loans to the pre-financial-crisis mortgage industry, and said that the Fed is watching closely. He added that the leveraged loan market doesn't represent a current threat to the financial system. The Financial Stability Board is reviewing the global leveraged loan market, with a focus on CLOs, as part of its work to spot stress in the financial system.
As the market has grown, secondary trading has remained relatively light. About $26.1 billion of CLOs traded last year through BWIC auctions, according to data from the bank's research unit. That was a fraction of a single day's trading of Treasuries in 2018, according to Securities Industry and Financial Markets Association data.
"We're pretty amazed how much inefficiency there still is given the technology today and there's a lot we can do to compress those inefficiencies," Zhang said. "We believe the best way to start that is organically from the bank, in house."
Startups, banks, and money managers have been trying for years to make more bond trading electronic. Progress has been slow. BlackRock Inc. found tepid support for its corporate bond trading platform because too many customers were looking to buy, and not enough wanted to sell. But a growing number of corporate bond trades are electronic.
Citigroup's electronic bidding platform is among the latest efforts by the bank's Spread Products Investment Technologies - or Sprint - team, which it formed last year to invest in debt market technology. The group found its first company to fund in February when it backed Better Mortgage Corp., which works to speed up the process of getting a home loan.
The bank is thinking about how to further profit from the new bidding platform, Zhang said. Citigroup is also hoping to add data and analysis from its research teams that sits alongside the bidding process, according to Katya Chupryna, a vice president in the Sprint group.
"On the analysis side right now, you end up going to multiple places, you need separate data sources, and it's really hard for who is trading to have a full picture," Chupryna said. "Our long-term goal is to make the analytics part as transparent and user friendly as the trading part."
