When it comes to fixed-income investments, the devil is in the details, especially when a credit event such as a default is approaching.
Because the specter of default is omnipresent in the high-yield bond market, investors who trade these securities scour paperwork related to the bond in question, from the credit agreements and amendments to indentures and supplementals. They are trying to understand what the debt issuer can or can't do.
The due diligence of reviewing legal documents can take months. And what is worse, because investors are spending so much time doubling as lawyers, they have less time to size up other alpha-generating investments.
In order to alleviate the burden of reviewing these documents, financial technology start-up Street Diligence has launched a platform that automates the due diligence process. The service reviews and structures relevant documents so that it is easier for investors to assess the fixed-income investments.
For example, investors can quickly compare similar terms across documents with interactive navigation. They can skip through covenants by using the relevant menu.
Street Diligence allows users to drill down into the source document to quickly audit one's work. And the service also aggregates all previous versions of the master document so that users can be sure which version they are reading.
In short, this product is a time saver.
The startup's founders, Duo Ai and Stephen Hazelton, were all too familiar with the time-intensive due diligence process involved in reviewing fixed-income securities. Hazelton was a hedge fund manager who thought that there must be a more efficient way to evaluate bond investments.
He joined with Ai, the technical lead who is developing the legal language processing technology. Ai has spent more than a decade in software development in the financial sector, most recently at investment management firm Bridgewater Associates.
Previously, he worked in the fixed-income group at Barclays, Goldman Sachs and Lehman Brothers Holdings. Like Hazelton, Ai has prior start-up experience, having founded an algorithmic-trading firm.
Ai and Hazelton have indeed spotted an opportunity in a sizable market. The high-yield bond market has about $1.7 trillion in market value, and the market for covenant analysis products is an aggregate $1 billion to $2 billion.
Investment banks and institutional investors conduct research on high-yield bonds and bank loans, and are very much in need of analytical tools.
Although Street Diligence has few direct competitors, two research firms are also making inroads into the market: Covenant Review and Xtract Research. They sell literature written by lawyers with experience in debt covenants.
What makes Street Diligence different is that it provides software that analyzes the actual documentation related to the bond.
"Street Diligence is the way of the future," Ai says. "We help save investors time so they can spend more time investing."
Launched in 2012, Street Diligence has raised $1.8 million in Series A financing and has garnered several thousand users. The product covers more than 3,000 high-yield bonds and 2,000 bank loans.
Right now, they are focused on these two markets, but they might expand into private-equity deal documents and convertible bonds.
They could also broaden their geographic reach from U.S.-based instruments to those in Asia and Europe.
With more automation tools coming online, bond investors can spend less time sorting through legal documents and more time investing.