Octaura Holdings, an electronic trading platform for syndicated loans, has launched a new protocol to make the liquidations of collateralized loan obligations far more efficient.

Brian Bejile, chief executive of Octaura, told Markets Media: “CLO liquidations are one of the biggest pain points in the industry.”

CLOs are securities backed by a bundle of loans. Managers consolidate hundreds of loans and then sell portions of a CLO, or tranches, to outside investors. When a CLO reaches maturity and is redeemed, the CLO manager has to liquidate the portfolio and sell hundreds of loans. Bejile explained that this process was manually intensive, with the selling manager sending out a giant spreadsheet of the individual loans and asking for bids.

“This bogs down the whole market because everybody is looking at the list and waiting for this market moving event,” Bejile added.

There were over 70 CLOs liquidated in the market in the first half of 2024, a 1,200% increase from the same time last year according to a blog from Octaura. The blog said these liquidations occurred over 56 days, so the loan market was likely locked up for about 450 hours across the first six months of this year.

Octaura launched its electronic loan trading solution in 2023 and has grown the platform to 19 dealers and 119 buy-side firms, according to Bejile. He argued this puts Octaura in the best position to tackle the problem of moving the industry from spreadsheets

Historically, CLO managers  have needed to spend time creating, and sending out spreadsheets, wait hours for responses and then chase bids from multiple dealers via phone, e-mail or chat. As a result Octaura has created an electronic auction protocol, Market Lists, to streamline the CLO liquidation process from days to four hours or less.

Market Lists can also provide data and analytics to help CLO managers prepare lists. Lists can then be sent to their choice of dealers and simultaneously made visible to the buy side, together with any stipulations. The platform allows managers to track responses in real-time, compare offers to internal targets, execute trades with the best terms available and provide color to dealers within minutes. By connecting Octaura to an order management system, trades can be automatically booked after a bid is accepted.

The average dealer can trade hundreds of loans so Octaura can provide the last prices they quoted on a certain name, and it just takes a click of a button to make a bid using the same quote.

“They can show up as bids on a lot more names, because we are making it easy for them to do that,” said Bejile.

The buy side are also alerted if the auction includes any names on their watch list, which helps increase the quality of execution for the seller. Bejile said Octaura has rolled out Market Lists in testing to select clients.

“There have already been three auctions and they have been a great success and they traded very well,” he added. “Some of the comments were that it is about time.”

Clients are already investigating new ways of using the new protocol. For example, the process of buying the initial CLO assets has also historically been a manually intensive process.

“Market Lists is a good precursor for when we tackle CLOs,” said Bejile. “We will be much more informed about market dynamics and market structure.”

Growing volumes

Octaura said that 2.2% of the leveraged loan market traded on its platform as of 31 July 2024. Bejile said this was an important landmark because other markets, such as high-grade bonds, took 10 years to trade 2% electronically.

“We reached 2% in 15 months, which speaks to the fact that the market is ready,” he added.

The growth has come from onboarding more dealers and buy-side firms, and launching more product protocols which solve pain points for the industry.

“There is no shortage of pain points,” said Bejile. “When I speak with my chief product officer, we have five years of work ahead of us.”

For example, there has been huge growth in ETFs, particularly in CLOs, and also in loans, so there is a growing volume of portfolio trading which needs to be more efficient.

“Our business is about finding problems and fixing them,” said Bejile.