Syndicated loans blockchain stock
Global financial services firms are looking at ways to adopt the technology behind Bitcoin for use in institutional finance, according to a new Greenwich Report, Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets , from Greenwich Associates. The technology that allows Bitcoin to exist and to be transferred safely without an intermediary is called the blockchain. Between May and June of , Greenwich Associates interviewed institutional financial professionals to determine the level of awareness and understanding of distributed digital ledger technologies among financial services firms. Distributed Ledger as Risk Reduction Tool While the motivations for adoption are varied, there are a few major themes common across the study participants. Settlement, counterparty and custodial risk reduction were all key drivers.
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Content:
- Tokeny and Lition Partner to Pilot a €20 Million Syndicated Loan
- Getting to grips with blockchain
- Less hype and more collaboration: how Barclays is exploring blockchain technology
- How Blockchain technology is transforming the financial services sector
- Peer-to-peer lending
- Chapter 6: BLOCKCHAIN IN FINANCIAL SERVICES
- Blockchain technology branches out from finance sector with EY deal
- New FinTech applications in bond markets
- Australia Looks at Syndicated Loan Role for Blockchain
Tokeny and Lition Partner to Pilot a €20 Million Syndicated Loan
Peck and Steven J. Related Content. Digital token issuances also known as "initial coin offerings" ICOs are becoming more common as a way for businesses to raise funds.
Using a decentralized database shared across a network of computers, blockchain technology allows for this new way to fundraise. As digital tokens have grown in use, so has their complexity, allowing issuances of digital tokens with a variety of purposes.
ICOs primarily compete with traditional early stage equity and debt fundraising. While the amount of money raised from ICOs in so far is lower than raised in , digital token offerings remain an alternative source of financing for a business. Depending on the structure of a digital token, benefits remain to companies undertaking an ICO, including the ability to structure a fundraise in a manner that does not dilute existing equity, increasing the pool of possible investors and creation of bespoke terms.
However, there has not yet been a significant disruption of the loan market caused by digital token sales. Lenders struggle with credit analysis of companies that own or issue digital tokens and with the treatment of digital tokens in loan documentation. A borrower typically sells digital tokens in two ways, either by the issuance of a digital token by the borrower in an ICO or the secondary purchase or sale by the borrower of a digital token that is otherwise unrelated to the borrower.
In either situation, the loan market has not yet agreed on a standard approach for addressing these sales of digital tokens. The variety of features digital tokens may have complicates analysis of their sale under credit agreements. For example, potential uses for digital tokens include use as:. A form of currency. The medium of exchange for services on a particular platform. A representation of a real-world asset. A representation of the right to vote on particular actions within a community or platform.
Most credit agreement forms currently used in lending markets are not prepared with digital token sales in mind. Accordingly, when analyzing which provisions of a credit agreement may be violated or impacted by a digital token sale, it is not necessarily clear in what category of activity the token sale is best classified.
In the absence of specific language governing digital token sales, a digital token sale by a borrower may conceivably fit into various categories of actions under a credit agreement depending on the features of the token, including:. The incurrence of debt. The digital token sale may potentially trigger mandatory prepayment obligations, impact the calculation of financial ratios or baskets, or even constitute a change of control. If the digital token sale violates applicable law, that violation may also be a breach of the credit agreement leading to an event of default.
An Example In many cases, there may not be certain answers regarding classification of digital token sales under a credit agreement. This uncertainty increases the risk of disputes between lenders and borrowers.
An example is helpful to see the potential disputes. Consider a company that is starting a new video sharing service. Users must pay to view a video using the service's proprietary digital tokens.
The tokens paid by a viewer to watch a video are split between the company and the creator of the video. The company decides to launch a token offering, the proceeds of which it intends to allocate towards development of the service. Once issued, the tokens would be tradable in a secondary market. The company's lender argues that the token offering is an asset sale as defined in its credit agreement and that the mandatory prepayment provision of the company's credit agreement has been triggered.
As a result, the lender argues that the proceeds of an asset sale be applied to pay down the outstanding loans under the credit facility. The company, however, argues that the token offering is just a pre-sale for its video sharing service a sale of the company's services rather than a sale of an asset and that no asset sale has occurred.
A credit agreement's mandatory prepayment provision may require, subject to certain exceptions, that the proceeds of an asset sale or an equity issuance by the borrower be applied to pay down a portion of the outstanding loans under the credit facility. If this provision were applicable, the proceeds of the digital token sale must be used to pay down the loan, which may not be an outcome that the borrower prefers or anticipates.
However, depending on the nature of the digital token, the borrower may argue that this is not a sale of an asset or the issuance of equity, but rather a sale of goods and services and that the mandatory prepayment provision was therefore not applicable. It may not be obvious which party has the better argument if a disagreement between the lender and the borrower occurs regarding classification of a token sale.
The analysis may be made more complicated if the company issues digital tokens that it holds back and then later sells in a secondary offering, perhaps anticipating appreciation in the value of the tokens. Another scenario should also be considered where the token has voting rights regarding certain material actions that may be taken by the company or the community of users of the video sharing service.
Those features may make the token more likely to be considered a form of equity. A digital token may be even more equity-like by including other features, such as the ability to receive cash or stock in the company in certain circumstances. An accounting analysis must take into consideration the particular features of a given token. Issues that may come up regarding financial calculations in a credit agreement include whether:. Should the proceeds of a sale of digital tokens be included in the calculation of excess cash flow and does it matter if the token sale proceeds received are in the form of other digital tokens, rather than cash?
Are digital tokens held by the borrower included as assets on the balance sheet? If the secondary market price of digital asset tokens held by the borrower changes, should the borrower mark-to-market? Under what circumstances does or should a token sale be considered to have increased total indebtedness of the borrower? If the company makes a payment whether in cash or otherwise to the holder of a digital token, is that payment a "restricted payment" under the credit agreement?
Lenders should consider whether commitment papers should explicitly address digital token sales and to what extent they should be considered a form of alternative financing. For example, these documents often contain an exclusivity provision providing for a period of time during which the borrower agrees to deal exclusively with the lender regarding debt financings and similar transactions.
A lender may want to include a prohibition or restrictions on digital token offerings by the borrower during the exclusivity period. Similarly, a fee letter or commitment letter in a syndicated financing may contain market flex provisions that permit the arranger to modify the financing contemplated by the commitment letter in various ways to obtain a successful syndication. It is conceivable that at some point in the future a lender may actually decide that a debt-like token offering may be the best path forward for the borrower.
Lenders should also consider whether specific token sale related requirements should be added to credit agreements. Potential changes may include:. Requirements for either lender consent to a token offering by the borrower or an obligation for the borrower to provide the lenders with documentation and background information relating to the potential token offering, the intended use of the tokens and the proceeds of the token offering. Covenants specifically addressing securities law, know your customer KYC issues, and anti-money laundering AML issues relating to digital token sales.
Language addressing these issues have begun to be included in credit agreements. However, these provisions have been individually negotiated, and there is not yet a market standard. If a borrower owns digital tokens, a lender may be interested in taking a security interest in those digital tokens.
Lenders that decide to accept digital tokens as collateral need to consider both legal issues as well as practical considerations. While digital tokens may not be securities under the UCC, it is possible that they may in some circumstances otherwise qualify as "investment property" under the UCC. If a securities intermediary and a customer agree that specific digital tokens are financial assets and those assets are held by the securities intermediary in a securities account, the digital tokens may qualify as investment property.
If the digital tokens do not qualify as investment property, they are likely to be classified as "general intangibles," which is the UCC category for types of personal property that do not fall into the other UCC categories.
The requirement under the UCC for perfecting a security interest in a general intangible is to file a UCC-1 financing statement identifying the debtor and describing the collateral in the appropriate jurisdiction. While perfection of a security interest in a general intangible under the UCC appears simple, in practice, however, cryptocurrency collateral raises several issues for lenders discussed below. Issues with Digital Tokens as Collateral Before taking cryptocurrency as collateral, a lender should consider, among many issues:.
How it controls the collateral. How it enforces its security interest in the collateral. How the general intangible classification affects digital tokens as collateral. The regulatory issues facing cryptocurrency collateral.
For more information about taking a security interest in digital tokens, see Practice Note, Security Interests: Bitcoins and Other Cryptocurrency Assets. A lender should consider not only how the digital token sale impacts the borrower's business, but also the reputational, legal, and regulatory implications for both the borrower and the lender. Digital token sales may be subject to various legal and regulatory regimes, including banking and money transmitter rules and securities and commodities regulations at US federal and state levels as well as foreign jurisdictions.
Lenders should do their diligence on digital token sales by borrowers to avoid being surprised by adverse consequences if the token sales run afoul of these regulations. Lenders should familiarize themselves with how the digital tokens are expected to be used, how they are marketed to purchasers and what promises, if any, the borrower is making to the purchasers or users of the tokens.
This diligence process may include having the borrower fill out a questionnaire regarding the expected use and manner of sale of the tokens and the use of the proceeds of funds raised and providing the lenders with all offering documents and marketing materials for the tokens. Lenders need to make sure that they have a plan to comply with their KYC obligations and that they understand the risks of any potential dispute between the token issuer and any purchasers.
As with any new product, there is always the possibility of unexpected negative consequences. The market is growing and government oversight and regulation is evolving, including to stop some of the past utilization of blockchain technology and digital tokens for criminal activity.
More conservative lenders, concerned about their reputation or relationship with its own regulators, may avoid too much involvement with digital tokens until the market is more widely accepted.
The use of blockchain technology in the loan market is a related but separate discussion from the sale of digital tokens. Blockchain technology has potential for various applications in financial services, particularly from an operational perspective.
Blockchain technology was introduced as part of the bitcoin electronic currency. Bitcoin required a distributed ledger as it was set up explicitly to not require a centralized database.
With a blockchain, data is shared across a decentralized network of computers in a way where records are linked in chronological order with no central database. A blockchain maintains a history of all the transactions that have occurred since the beginning of that blockchain and uses cryptography to prevent tampering.
Blockchains can have many uses in the loan market, such as netting and clearing of loan trades and settlement of loan transactions. Managing collateral filings is another potential use case. These processes may be sped up and performed more efficiently using blockchain. Loan Trading Use Case As mentioned above, one of the advantages of blockchain technology is that a blockchain contains a history of all transactions that have occurred since the beginning of the blockchain.
If the user of a blockchain needs to know which party owned a specific asset at a particular point in time, that information would be easily ascertainable from checking the records on the blockchain. This feature may be valuable in the loan trading market. If the loan trading market generally adopted blockchain technology, it would always be clear which lender was in a deal at any time and the amount of loans or commitments it held.
The trading of distressed loans in particular would greatly benefit from this technology. Unlike in the par loan market, settlement of LSTA distressed loan trades requires due diligence into the chain of title from the first transfer of the loan all the way to the seller. If there have been many trades, accurately identifying and describing the full history can be challenging and time consuming.
Getting to grips with blockchain
Market participants hope to speed up settlement and collateral transfers with digital tokens recorded on the blockchain. Imagine an integrated ecosystem in financial markets, where every real-world asset is also represented by a digital unit or token. Some see it as having the potential to reduce operational costs and minimize the number of market venues and intermediaries needed in capital raising. Tokenization could also reshape the investing landscape by connecting up issuers to a more diverse set of buyers and sellers, who may consider fractions of assets more attractive and affordable. The potential benefits of tokenization are significant — both pre-trade, for issuers who could save money by removing layers of friction in their normal workflows; and post-trade, where the technology could be used for efficiencies in things like collateral transfers and trade reconciliation. Distributed ledger technology DLT has digital signatures in it that govern the transfer of token ownership and allow peer firms to exchange value directly.
Less hype and more collaboration: how Barclays is exploring blockchain technology
Banks and financial institutions have been spending significant sums to explore potential applications of blockchain technology. The financial services industry is among those areas predicted to benefit the most from blockchain use in the years to come. This chapter investigates this prediction after providing a primer on blockchain. It analyses the potential of blockchain to increase efficiencies and to transform business processes in a number of areas within the industry such as the trade life-cycle of securities and of derivatives, payments, traditional financing arrangements, asset management, insurance and corporate governance. It also examines new currencies and cryptoassets, phenomena ultimately enabled by the use of blockchain technology. You are not authenticated to view the full text of this chapter or article. Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage. Your library may not have purchased all subject areas.
How Blockchain technology is transforming the financial services sector
Utilizing distributed ledger technologies in banking and finance provides not only improved operations efficiency and reduced risk versus legacy systems, it also presents huge potential for new products and services. The digitalization and automation of banking and financial services promises to improve efficiencies, reduce costs and risks, unleash the benefits of coordination, and unlock use cases that were previously unachievable. However, efforts to digitize banking and financial services over the last 20 years have been hampered by legacy IT systems, which suffer from weaknesses that derive from insufficient security and lack of interoperability. Broadly speaking, blockchain enables the digitization of financial services by offering a more secure, transparent, and open data management system that also has the capacity to ensure confidentiality and secrecy where needed. Legacy systems Single point of failure increases security risk for data.
Peer-to-peer lending
This might not be a surprise given how much it does and will continue to impact the global financial system. Trillions of dollars travel between billions of people on a daily basis. The current system has worked for some time, but as technology grows, people find that the current system has many problems: additional fees, delays, fraud, crime, and extraneous paperwork. The system is often not consumer focused. Businesses hold consumers responsible for these failings by making them pay higher regulatory costs.
Chapter 6: BLOCKCHAIN IN FINANCIAL SERVICES
Blockchain has changed the way people think about money. Our focus has been on identifying the use cases for blockchain that will change the way we do business for the better, by simplifying processes and removing inefficiencies across our industry — ultimately for the benefit of our customers and clients. The prevailing view is that blockchain will cause two main shifts in the way Barclays does business. The first is in its broad potential to bring financial institutions closer together and make global collaboration easier. The second is by creating real efficiencies in the way the bank processes data.
Blockchain technology branches out from finance sector with EY deal
The integration of blockchain technology into multiple facets of our world could greatly streamline many industries that affect our day-to-day lives, and financial lending is the ideal forum. A natural progression of P2P lending, blockchain application can make the entire lending process more seamless and greatly reduce the amount of time the process takes. According to its website , SALT is the only platform built to facilitate loans secured by blockchain assets.
New FinTech applications in bond markets
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Australia Looks at Syndicated Loan Role for Blockchain
Bracewell has one of the most highly respected and diverse global lending practices of any law firm in the world. Our finance lawyers have a stellar reputation for advising borrowers and lenders on billions of dollars in financings every year. Our energy finance lawyers are involved in every stage of a lending transaction, including refinancings and restructurings both in and outside of bankruptcy of existing loans, debtor in possession DIP financings, and exit financing for both borrowers and lenders. For example, we recently represented Wells Fargo in connection with the Chapter 11 reorganization of Diamond Offshore Drilling , including the exit financings entered upon emergence from bankruptcy. We represent lending clients in various industries but have particular strengths in the energy sector. At the same time, we represent major energy companies and private equity funds with energy investments, including The Carlyle Group , Phillips 66, and Targa Resources.
On 27 April , the EIB launched a digital bond issuance on a blockchain platform, deploying this distributed ledger technology for the registration and settlement of digital bonds, in collaboration with Goldman Sachs, Santander and Societe Generale. The EIB believes that the digitalisation of capital markets may bring benefits to market participants in the coming years, including a reduction of intermediaries and fixed costs, better market transparency through an increased capacity to see trading flows and identity of asset owners, as well as a much faster settlement speed. These digital bonds will play a role in giving the Bank a quicker and more streamlined access to alternative sources of finance to boost finance for projects across the globe. By helping to create a framework for a new market ecosystem, the EIB believes this will bring value added for both issuers and investors, while contributing to an innovative, efficient and secure market infrastructure.
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