What is asset-backed finance?
Learn what asset-backed finance is, how it works and its role in portfolios through our overview and video.
While corporate lending bets on the health of a single borrower, asset-backed finance takes a different approach entirely—one built on pools of cash-generating assets. Here's a quick breakdown of how it works, and why it's becoming a core building block of modern credit portfolios.
Definition
ABF (Asset-Backed Finance):
Debt repaid by the contractual cash flows from a pool of assets contained within a standalone legal entity.
Corporate Credit:
Debt repaid by—and reliant on the health of—a single company.
Key Terms
- Assets: Characterized by the generation of predictable cash flows, including residential mortgages, phone contracts, music royalty streams, aircraft leases and credit card receivables.
- Originator: Generates the assets that the ABF manager lends against—for example, an equipment leasing platform or issuer of home improvement loans.
- Pool: Represents the bundling of many similar assets—for example, 100 car leases—into a single vehicle.
- SPV: The ‘‘special purpose vehicle” is a separate legal entity that secures the investors’ security interests in the assets by isolating them from other assets of the originator.
In Practice
- The ABF originator generates assets. In this context, assets are characterized by producing predictable cash flows, so generating assets could take the form of making new loans or leases.
- The assets are pooled into a special-purpose vehicle (SPV), which then issues debt secured by the assets.
- The ABF manager provides financing to the SPV and is repaid directly by the cash flows produced by the underlying assets. Principal is returned incrementally during the life of the loan rather than entirely at maturity.
Successfully accessing ABF isn't easy, requiring specialized underwriting and structuring expertise. The reward is a less congested asset class than traditional corporate credit, underpinned by a diverse range of cashflow-generating assets.
Watch for a deep dive on ABF
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