(Bloomberg) – After opening up new ETF opportunities for Pimco more than a decade ago, Manish Dutta and Tammy Arnold have targeted one of the most opaque corners of municipal finance.
Their company, Alpha Ledger Technologies, aims to modernize the municipal direct lending marketplace with a blockchain-based platform, the technology used to verify and record transactions that underpins Bitcoin.
The firm’s system allows cities and localities to auction their loans, allowing a broad group of investors, such as regional banks, to bid, potentially lowering the cost of borrowing from these relatively small private funding sources. Another advantage is that the system provides online registration of applications and transactions – a novelty for settlements that are used to keeping paper records.
This means moving away from the “old school” underwriting process, where decisions about bank selection and loan terms can be private, said Dutta, chief executive officer of Alpha Ledger. According to him, the platform was used by 50 banks, including local, regional and national banks.
“On our platform, this is an open, direct, transparent market,” he said.
Founded in 2019, Poulsbo, Washington, took a step further in July when California’s Coachella Valley Unified School District borrowed funds through its platform. It was one of five lending transactions that Alpha Ledger completed this year, after two in 2020.
In the second quarter, banks held about $ 197 billion in direct loans to municipalities, according to research firm Municipal Market Analytics. Alpha Ledger wants to enter the arena of public debt, which accounts for the bulk of municipal borrowing, sometime in 2022.
The municipal market, with nearly $ 400 billion in bonds and notes annually, has proven difficult to undermine. In one example, Neighborly, a venture that tried to sell municipal bonds in smaller chunks than the usual $ 5,000, backed out in 2019.
Dutta, who worked on technology development at Pacific Investment Management Co., co-founded the company with Christopher Wade and recruited former colleagues such as Arnold and Don Suskind, who worked on ETF products at Pimco.
“Nothing but competition”
Usually, in the case of municipal loans, borrowers hire consultants who request applications from banks. Municipalities can also contact banks directly. In the case of direct borrowing, officials have found that they can borrow at rates comparable to bond rates, without the fees or disclosure requirements associated with public debt allocations.
Alan Crane, chief financial officer of Kitsap Bank in Port Orchard, Washington, said his bank had joined the platform, although he knew it was “nothing but competition” in the lending market.
“I admitted that if we don’t work with them on this, someone else will do it,” he said. “I’d rather work with them and understand how to change our business than be left unattended.”
Kitsap manages a portfolio of approximately $ 280 million in municipal debt, including loans, and has been involved in four transactions on the platform. Crane said he saw the bidding process provide lower rates for borrowers, as well as more flexible terms for them, and said that this helps to increase the transparency of pricing.
“When banks compete, you win” as a borrower, he said.
Mooney bondholders in the dark as borrowers evade loan disclosure rules
Arnold and Dutta met in 2008 when Arnold was tasked with launching Pimco’s actively managed bond ETF products, an effort that she said extended existing technologies to compliance, trading, and disclosure.
For example, a money manager had to solve problems with ETF pricing, which updates instantly because funds are listed on the exchange, and mutual funds can, if necessary, determine the value of net assets overnight.
Arnold’s request for more help with technology led to her connection to Dutta. Both have worked at Pimco for about two decades. She says ETFs have shown how to make small transactions financially viable given that they needed to be available to investors at a much lower cost than, for example, mutual funds.
This is now relevant to Alpha Ledger’s strategy of focusing on municipal loans, which tend to be smaller. The average loan size the company has worked on is about $ 3 million.
“It’s an exercise in accessing small transactions and the economy,” said Arnold, the company’s head of business strategy.
Alpha Ledger charges a so-called technology fee, which is fixed regardless of the size of the loan and which the company refused to split. The company is working with municipal and bond consultants to look for new business, Datta said.
David Ulbricht, director of advisory services at SDAO Advisory Services, which advises Oregon-based issuers, said he researched the blockchain for two years after first meeting with the company in 2019. He wanted to make sure it would be a good product for his customers. which includes special districts, cities, school districts, and districts.
“Basically, this is the digitization of everything,” he said. “You know, okay, that’s where things are going.”
The platform helps banks learn about transactions – and as a result, financing terms within the platform are “very, very” competitive and can cut costs such as bank advisor fees, which ultimately benefits borrowers, Ulbricht said.
The platform also offers a debt management tool, which Astoria Oregon, which operates an airport in Warrenton, Oregon, liked. Melanie Howard, the port’s accounting and business services manager, said in April the company received a $ 1.3 million loan through the platform and plans to host its $ 14 million loan portfolio.
The port usually tracks its loans in a spreadsheet, she said, while blockchain technology enables both the port and banks to have readily available loan information.
“It strengthens the relationship between the lender and the borrower,” she said.
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