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Bruce Richards highlights the varied opportunities and risk mitigation in asset-based lending
Key Takeaways
- Asset-based lending (ABL) is an interesting way to diversify a portfolio, given its potential lower correlation with the broader market, in contrast to standard corporate lending.
- ABL involves extending loans backed by tangible assets, such as property, equipment, inventory, and intellectual property. Loans frequently have a Loan-to-Value (LTV) ratio of around 60%.
- By securing loans against tangible assets, lenders may be able to mitigate risks and still offer competitive interest rates.
Transcript
Hello, I'm Bruce Richards. I’m the CEO, managing partner, and chairman of Marathon Asset Management. Founded the firm 25 years ago with Lou Hanover, we're a global credit manager focused on investing in the credit markets throughout the world, with 180 professionals in six different offices.
We're seeing tremendous flows in asset-based lending because much of the investment community, from the RIAs to large institutions, want to diversify their portfolio. In addition to the corporate middle market lending, they also want asset-based lending. It's a nice balance, it's a nice diversification, and it's a little bit less correlated to markets than the corporate market is. Asset-based lending is lending based upon actual assets. And the assets can be anything: property, plant, equipment, inventory, and the lending points are you make a loan at like a 60% LTV so you have a 40% margin of safety between what the equity is in the transaction and where your lending attachment points are. And so, for instance, asset-based lending is a range of commercial real estate lending, residential lending, having security value of, say, auto loans, or companies' plant, equipment, inventory, intellectual property. In fact, we've done royalty streams on healthcare companies. It can be transportation assets from aviation to trucking to maritime. And so, for instance, one could own a plane, a Boeing 737, Airbus A320, lease it to any one of the airlines around the world, and get a structured cash flow payment from that lease, which is a triple net lease, and your asset is the property. And you have an obligor, which is the airline, secured by the property, and make attractive rates of return where you’re senior secured and have a perfected interest in that asset. So, we love the asset-based lending space because the loss rates are typically low, and the returns are relatively attractive.
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