BBVA says it recently completed the first-ever syndicated loan on a distributed ledger. Could this pilot offer a glimpse of the syndicated loan of the future?
The borrower, Red Electrica, is a power distribution company based in Spain. The company asked for $150 million for unspecified “general corporate purposes.” BBVA brought in MUFG and BNP Paribas to participate in the loan.
Normally when several banks participate in a large loan, it takes at least two weeks for the counterparties to agree on terms, said Ricardo Laiseca, head of global finance at BBVA corporate and investment banking.
“Whenever you invite more banks, it gets more complex,” Laiseca said. “We thought blockchain technology was the right technology to improve such complexity, because it helps you communicate efficiently and cut the time to come to an agreement from two weeks to just one day.”
The banks are using BBVA’s homegrown distributed-ledger technology, a private blockchain based on Hyperledger, to handle the loan agreement from the borrower’s request for financing to the signing of the syndicated loan documentation.
All related documents are stored on the blockchain, including the borrower’s request, a term sheet and the final loan agreement. Each step of the negotiation leading to the signing of the final agreement is recorded on the distributed ledger along with a user code and time stamp identifying the moment the event occurred. All parties (in this case the three banks, Red Electrica, and two legal firms, Linklaters and Herbert Smith Freehills) have access to, and share the same information about, the negotiation process, and thus are equally informed of the status of the loan.
In addition to saving everyone time, the distributed ledger provides transparency, according to Miguel Castillo, head of Spanish global clients at BBVA.
“All the participating banks know where the process is at any given time,” he said. Within BBVA, people in the legal, credit and other departments can all see the transactions.
“At the end of the day, it gives more integrity to the whole process in terms of transparency,” Castillo said. No information is lost, and there is less room for mistakes and misunderstanding because everything is recorded on a shared ledger.
When the agreement has been completed, a document identifier is created for it and encrypted; this is called a hash and is recorded on the public Ethereum testnet. This is meant to guarantee its immutability against third parties while safeguarding its confidentiality.
“We chose that as a big, recognized public blockchain where we can record the hashes of the actions we agree to among the banks and the company,” Castillo said.
BBVA plans to make more loans to European clients on its blockchain in coming weeks. Earlier this year, it made a loan to Indra, a technology company based in Madrid, using its blockchain to come to terms.
The clients do not reap a direct benefit from the use of the blockchain. But some customers, including Red Electrica, are undergoing their own digital transformations and blockchain proofs of concept, and are therefore willing to test the technology along with the bank to advance their own innovation aims and understanding.