Oaktree: Asset-based funding faces financing void

Asset-based funding (ABF) faces a financing void as banks and insurers stay within the investment grade corner of the market.

According to Oaktree Capital’s latest quarterly performing credit report, asset-backed lending is becoming the domain of alternative asset managers.

But the report’s authors Armen Panossian, co-chief executive and head of performing credit, and Danielle Poli, managing director and assistant portfolio manager, found that even among private lenders there are still significant barriers to entry.

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“As traditional lenders face further headwinds, we believe the next chapter in the private credit story is the migration of ABF toward alternative capital providers,” they said.

“While the asset class isn’t new – lending against contractual revenue streams has historically been a cornerstone of bank and insurance company activity – the fundamental transition lies in who now provides the capital.

“Asset-backed financing may become increasingly unfavourable for banks, and insurers generally stick to the investment grade corner of the ABF market.”

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The report went on to add that alternative lenders currently play a smaller role in ABF than in mainstream direct corporate lending, which is more established. By comparison, ABF represents a new frontier for alternative asset managers.

Panossian and Poli observed that the most underserved portion of the ABF universe is the ‘‘core’’ segment that sits between senior, investment grade lending and the opportunistic end of the risk spectrum.

“We anticipate alternative lenders will increasingly provide essential capital in the core ABF segment where traditional senior lenders, such as insurers and banks, are unable or unwilling to operate,” they added.

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