Behind the scenes on bank debt: Q&A with John Falcone, Enfusion’s Global Head of Managed Services

Enfusion has emerged as an industry-leading platform for investment managers to effectively oversee their credit strategies and bank debt investments. To gain deeper insights, we sat down with John Falcone, our Global Head of Managed Services and resident bank debt expert, to delve into the trends reshaping the credit market, learn more about this area of focus and what’s happening next. Read excerpts from our interview below.

A: With the challenging conditions of the current market cycle, we’ve been seeing more and more investors incorporating credit into their portfolios. Take a look at any headline and you’ll know that the distressed debt market has grown dramatically, with nearly $650 billion of bonds and loans in distressed territory by December 2022, according to data compiled by Bloomberg.

But another credit market has also been growing in popularity: bank debt. We’re seeing not only credit funds and funds of funds adding bank debt to their portfolios, but also equity funds looking to diversify their strategies.

Many investors are taking a multi-tiered approach to modeling companies’ overall capital structure: they might own bank debt, loans, and equity. Just as convertible arbitrage investors utilize long and short positions to hedge against market movements, managers might use bank debt in conjunction with other instruments in a holistic strategy.

A: Bank debt offers some attractive characteristics in any market, but as an asset class it becomes even more appealing when interest rates rise or when corporate credit conditions decline. For investors who feel that markets are moving toward challenging conditions and rates are rising, they might see bank loans as underpriced securities that could benefit immensely from reorganization or liquidation. Some of the key benefits of bank loans include:

Additionally, bank loans’ settlement timeframes are much shorter than they used to be (T+7 currently vs. multiple weeks or months previously), which is a significant improvement that gives clients more accurate P&L.

Because bank debt offers this unique combination of benefits, more investors are including it in their portfolios — but trading bank loans is inherently a very manual process.

A: For all its benefits, bank debt comes with a complex workflow and niche knowledge requirements. Traditionally, operational teams have had to utilize disparate point solutions and spend countless hours on manual tasks — an inefficient workflow that is time-consuming as well as prone to error.

Additionally, there are specific legalities and complexities to bank debt; for example, teams need to understand funded and unfunded commitments, paydowns on unsettled trades, and late settlement cycle consequences.

Here at Enfusion, we saw that there was a gap in the technology marketplace for servicing bank debt investors. So, over the past two years, we’ve been building out support for bank debt within our single, multi-asset investment management platform. Because we were ahead of the curve, today we are the only end-to-end platform with native support for bank debt.

A: From reference data to reconciliations, most aspects of the bank debt trade lifecycle can be handled through our unified interface. Bank debt will always have some manual workflows involved, by its nature, but our seamless integration with our clients’ preferred third-party solutions and data licenses minimizes the work and risk of error. We match to Clearpar, calculate cost of carry to Secured Overnight Financing Rate (SOFR), and determine delayed compensation on a day-over-day basis, rather than in a lump sum at settlement, to maximize the accuracy of clients’ P&L and cash flow.

Because certain aspects of bank debt (floating coupon rates, paydowns) can change at any time, automation is key to ensuring accurate calculations. For example, for a fixed bank loan or credit facility, when the settled date crosses a coupon payment period with different coupon rates, we calculate delayed compensation using the first coupon rate instead of stepping up accordingly. Our clients love this feature of our platform.

And with companies who come into cash and pay down their loans, it’s critical to have a team like ours who understands how paydowns work, and a system that’s built to match. It’s always going to be a manual process, but we’re minimizing the work and maximizing the efficiency.

Additionally, our Managed Services team employs loan experts who can work as an extension of your team, taking care of everything from trade and settlement booking to ongoing asset servicing and reconciliations. For clients who don’t have in-house bank debt specialization or the interest in building it, it is often much easier and more efficient to task our team with middle- and back-office operations.

A: I was a client of Enfusion prior to joining the team two years ago. My firm was a credit/ distressed fund that was very active in the loan space, so I knew firsthand how powerful Enfusion’s system was and where there was potential to expand and improve. Our product team colleagues are some of the best in the business, and it’s been great collaborating with them on new features and enhancements for our credit workflows.

Enfusion’s client services team also had impressed me with their experience and customer-first commitment — that was one of the main reasons I joined. I saw an opportunity for Enfusion to further differentiate itself by bringing on more people with deeper credit backgrounds, which is exactly what we’ve done across the firm, from the product team to the Managed Services team. We’re committed to delivering excellence, and it’s amazing what a difference it makes to have seasoned, knowledgeable professionals supporting our clients in credit and beyond.

A: Enfusion had a vision early on that with the way markets were going, we should build out a credit-savvy team and get ahead of client needs. In that respect, we were definitely ahead of the curve compared to other technology providers — and the clients we’ve been engaging and signing on certainly validate that this was a good path to take!

Currently, we have a strong bench of Managed Services team members who understand the bank debt product and workflows, with more getting trained every day. We’ve built this team by looking for talent specifically with credit experience, rather than seeking only accounting and/or equity backgrounds. It comes down to anticipating the market cycle and where things seem to be heading, and hiring the specialists to match. This is unusual in our space, because people who are well-versed in bank debt are rare and are most likely to be working in-house at hedge funds.

As an open and agile tech firm, we do not operate in silos. Some of our product team members have evolved into client services roles, so our clients benefit from their deep expertise day-to-day. We also embrace a roll-up-your-sleeves work ethic — all of us (myself included) are actively working on client needs every day. It’s a huge benefit for clients to have anytime access to knowledgeable credit/bank debt specialists.

For us, the key to attracting and retaining great talent is empowering our people to be involved in all aspects of the business. Everyone is encouraged to provide input for how we build and be a part of the buildout, so people feel invested in the process and can see their ideas come to fruition.

A: We have lots of exciting updates in progress for our bank debt clients. I can tell you we are making the system even more robust when it comes to calculations such as delayed compensation and cost of carry along with how we handle interest and fees. We’re also exploring our partnership model, to further strengthen our security master. With these enhancements, Enfusion’s platform will be even better for managing bank debt investments.

The credit market has witnessed two notable trends: a growing interest in distressed debt investments and an increasing popularity of bank debt. Many investors are now adopting a multi-tiered approach, incorporating credit instruments such as bank debt, loans, and equity into their portfolios. Bank debt offers appealing characteristics, especially during rising interest rates and challenging market conditions. Its position at the top of the capital structure, floating-rate coupons, and typically greater yield with less risk compared to high-yield bonds make it an attractive option. However, trading bank loans remains a manual and complex process.

To address this challenge, Enfusion has been developing a comprehensive platform with native support for bank debt, making it easier for investors to manage their bank debt investments. Future product enhancements are expected to improve calculations, handle interest and fees more effectively, and strengthen security master processes, providing investors with better management capabilities for their bank debt investments.