As traditional lenders retreat, securities backed financing marches on
The US Federal Reserve has now brought interest rates to their highest level in 22 years following its latest hike on July 26 – and it has not ruled out further increases.[1]
Acknowledging that the impact of tighter credit conditions on businesses and consumers remains uncertain, Federal Reserve Chairman Jerome Powell called on would-be borrowers to consider carefully whether now is the appropriate time to secure loans for investment and growth.[2] The trouble is, even if the answer is yes, they might not be able to obtain them from traditional sources.
Fortunately, companies struggling to raise funding from public bond and loan markets are finding they can turn to private financing. These companies report that, in contrast to traditional lenders’ reluctance or perhaps inability to provide funding, private financing providers are willing and appear to have “significant liquidity” to meet their needs.[3]
Indeed, current circumstances have provided private financing an opportunity to shine.
One category that looks set to accelerate after having ramped up steadily in the wake of the 2008 Global Financial Crisis is private asset-based finance (ABF).[4] From an estimated $3.1 trillion in 2006, the market grew to $5.2 trillion by 2022. And according to projections from leading global alternative investment managers KKR, it could expand further to 7.7 trillion by 2027, spurred on by the retreat of traditional lenders in response to rising interest rates and volatility in the banking system.[5]
Private ABF is an attractive proposition for long-term shareholders and other investors, particularly at a time of heightened economic and geopolitical uncertainty. It provides a potential inflation hedge, downside protection and access to lenders who are less exposed to short-term market movements.
EquitiesFirst’s progressive brand of asset-based finance – securities-backed financing – allows investors to use their equities or crypto to unlock capital for other needs while still maintaining upside participation in those holdings.
These investors can use the funds for a variety of business or personal purposes. Additional benefits include greater stability should central bank tightening persist and economic growth stall, as well as more diversified returns.
Moreover, with securities-backed financing, interests are aligned during the term of the loan as the investor’s equity is transferred to become a part of the EquitiesFirst portfolio and EquitiesFirst also becomes an investor in the stock alongside the owner.
As a dedicated securities-backed lender, we have worked tirelessly over the years to streamline and enhance our processes in a way that benefits the parties on both sides of each transaction. As such, we are able to offer a level of efficiency that other capital providers – such as banks and other large financial institutions, for whom asset-based finance is merely a niche product – are simply not in a position to provide.
Managing risks
We are also cautious about how we manage our own risks – putting us in a favourable position during these challenging times.
Ratings agency Moody’s has cautioned that the private credit industry is about to face its “first serious challenge”[6] as tens of billions worth of loans extended at the market’s peak in 2021 – when interest rates were still close to zero – are strained by economic headwinds and uncertainty along with the lack of guidance on just how long higher-for-longer interest rates will persist. Moody’s also singled out two of the largest companies in the sector – Ares and Owl Rock – as being at risk from rising defaults.
As of July, corporate defaults are already running at their fastest pace in more than a decade for companies with public debt.[7] Though these have not yet made a significant dent on the overall economy, analysts have warned that the strain of rising defaults is mounting, creating a worrying — if still modest — risk of a financial crisis.
This highlights the fact that not all private financing is the same. In times like these, securities-based financing shows its worth. Though facilities need to be structured carefully, in general risks are limited by the capital provider’s ability to recover the securities or crypto provided by the investor to back the financing – and structured as a sale and repurchase agreement. This is also conducive to preserving systemic financial stability.
Structuring deals in this way has helped EquitiesFirst grow sustainably for 20 years – meeting investors’ needs in both buoyant and rocky markets.
[1] https://www.ft.com/content/110bd237-cbf2-463d-b1b5-edcb98245851
[2] https://www.forbes.com/sites/rohitarora/2023/07/26/fed-raises-interest-rates-to-22-year-high-credit-crunch-continues-for-small-businesses/?sh=4b3afef75b21
[3] https://www.reuters.com/business/finance/asias-private-credit-markets-thrive-desperate-borrowers-find-lenders-2023-07-20/
[4] https://www.kkr.com/global-perspectives/publications/asset-based-finance-fast-growing-frontier-private-credit
[5] https://www.kkr.com/global-perspectives/publications/asset-based-finance-fast-growing-frontier-private-credit
[6] https://www-ft-com.ezp.lib.cam.ac.uk/content/de6eb245-80ff-4f9c-b2ed-7a415538512b
[7] https://www.nytimes.com/2023/07/26/business/credit-markets-uncertainty-interest-rates.html
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