Asset-based and specialty finance

What makes it different

In a cash-flow loan you lend against a company's earnings. In asset-based and specialty finance you lend against a pool of assets, such as consumer or small-business loans, equipment leases, trade receivables or inventory, usually held in a bankruptcy-remote special-purpose vehicle (SPV). The pool's collections repay you, so the lender's questions change: what is the pool worth, how fast is it losing value, and what protects you if losses rise?

Common structures are warehouse facilities for non-bank lenders (revolving lines that fund new loans until they are securitized or sold), asset-based loans against a company's receivables and inventory, and forward-flow or portfolio financings.

Documents in the packet

• A collateral tape summary: balances, yields, terms, delinquency and loss history, usually by vintage.
• The borrowing base: how gross collateral becomes the amount you will lend against, after ineligibles and concentration limits.
• Eligibility criteria and concentration limits (obligor, industry, geography, collateral type).
• Advance rates, triggers and the cash waterfall.
• Servicing terms: who collects, the servicing fee, termination events and any backup servicer.
• Covenants on the sponsor or parent, such as tangible net worth and liquidity.

Key metrics

Typical risks

• Collateral quality: loss rates rising faster than the pool yield can absorb.
• Growth masking losses: blended loss rates look low when most of the pool is new.
• Fraud and data integrity: the borrowing base is only as good as the tape behind it.
• Dilution: for receivables, credits and disputes that reduce what customers actually pay.
• Servicer risk: if the originator fails, collections slow just when losses rise. A backup servicer and lender-controlled cash collections are the main protections.
• Definitions: eligibility, default and excess spread definitions decide when triggers fire.

How the structure protects you

1. Eligibility and concentrations keep weak or concentrated collateral out of the borrowing base.
2. Excess spread absorbs ordinary losses each month.
3. The first-loss cushion (overcollateralization or the sponsor's equity) takes losses next.
4. Triggers on losses, delinquencies or excess spread end the revolving period and send all collections to repay you.
5. The senior advance is impaired only after all of the above is used up.

Common memo mistakes

• Underwriting the parent's income statement instead of the pool and the structure.
• Quoting blended loss rates without looking at vintages.
• Treating the advance rate as given rather than asking whether it fits the collateral.
• Assuming the originator keeps servicing the loans in a downside.
• Describing triggers without showing which fires first and when.
• No breakeven: never saying how many times base-case losses the lender can absorb.

Practice on the asset-based case in the library. The model template for that case has tabs for the borrowing base, excess spread, a loss-and-trigger grid and a pool wind-down.