Data and Insights to assess a portfolio before M&A transaction

After a few years and a few transactions, banks often find themselves in a position where they struggle to get a consistent view of their entire book.

Sean Hunter, CIO at OakNorth

May 18, 2021

Global M&A has bounced back strongly in the first quarter of 2021, with Refinitiv reporting the total value of pending and completed deals reached $1.3 trillion. Banks, like all businesses, are positioning themselves to take advantage of the post-COVID 19 bounce back. The ON Credit Intelligence Suite can help banks evaluate transactions before they go ahead, assist with providing a consistent view of each borrower across existing and new loans (regardless of where the loan was underwritten), and help monitor the portfolio on an ongoing basis, providing early warning alerts for potential credit issues.

When assessing a target portfolio ahead of an M&A transaction, banks typically use a “loan tape” taken from the core banking system of a prospective target. This provides basic details of each borrower, drawn and committed balances, and information on whether the borrower is up to date with their payments. However, it does not typically contain everything an analyst needs to assess each borrower ahead of the transaction. Usually the acquiring bank will request a random sample of individual loan files to look at in more detail to determine if there are any areas of concern.

ON Portfolio Insights enhances this process significantly. With only a small amount of additional data concerning the working capital position, debt and financial health of each business, it can run granular forward-looking scenarios and forecast the liquidity, debt capacity and profitability for each borrower. This can be done very quickly (within 48 hours) and so early in the assessment process, the bank can choose a much better sample of loans for individual loan file review. Not only that, but the nature of the response could be an important indicator of how diligently the target institution has been monitoring the portfolio. If it is able to respond in a couple of days with the additional data points, that’s a pretty clear sign that the data is well managed and likely to be reliable. Whereas, if it is difficult to get the data and the institution says it will take them several days or even weeks, then that would tell a very different story!

After a few years and a few transactions, banks often find themselves in a position where they struggle to get a consistent view of their entire book. Borrowers originated by different acquired banks won’t have been underwritten to the same standard or in the same systems as the parent bank or each other. Bridging the gaps between multiple core banking systems and different credit and data management cultures mean that some seemingly simple tasks can take an extremely long time to perform. This friction can cause M&A momentum to stall under the weight of an ever-increasing operational burden.

ON Credit Analysis enables banks to get a consistent view of risk across the entire portfolio no matter where any individual loan originally came from. A common framework of subsector-specific financial analysis and automated peer analysis, ensures that common risk management standards can be applied across all loans. Meanwhile, automated sector insights provide credit officers with the vital data context they need to understand the sectors in which borrowers operate. This makes it quick and easy to familiarise themselves with the key drivers of revenue and costs in subsectors they are not yet used to.

Having this consistent point of view would only be of limited value however, if it was frozen in time. ON Portfolio Monitoring means the data is dynamically updated as new borrower information or sector information becomes available. As new financials and MI come in, forecasts update, and the system can generate early warning indicators and alerts to draw attention to any loans which may need the attention of the credit or monitoring team.

The data-driven insights provided by the ON Credit Intelligence suite and the speed with which we are able to provide results, make it a good fit for use in M&A. They can help with a better decision going into a transaction, and provide a consistent, holistic picture of risk afterwards, which is dynamically updated as new information becomes available.