Performing Credit Quarterly 3Q2024: Who Are the Lenders Now?

In Performing Credit Quarterly 2Q2024: The Dual Economy, we wrote about mixed economic signals frustrating the U.S. Federal Reserve’s ability to act decisively on monetary policy. After being – incorrectly – priced in multiple times over the past year, the first interest rate cut finally came in September, marking the end of the Fed’s hiking cycle. As we discuss below in Credit Markets: Key Trends, Risks, and Opportunities to Monitor in 4Q2024, this may unlock new M&A and LBO activity, generating more loan supply for the public debt and direct lending markets, both of which are hungry for new-money issuance. While the leveraged finance markets continue to readily absorb newly issued corporate loans, one less familiar area of the credit markets – asset-backed finance – faces a potential financing void.

Alternative capital providers supplanting traditional lenders is now a familiar tale. Banks, facing heightened capital regulations following the Global Financial Crisis, retrenched from corporate lending, effectively launching direct lending as a mainstream asset class. As traditional lenders face further headwinds, we believe the next chapter in the private credit story is the migration of asset-backed finance (ABF) toward alternative capital providers. 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 unfavorable for banks, and insurers generally stick to the investment grade corner of the ABF market. Even among private lenders, who are estimated to currently provide less than 5% of asset-back financing within the $5.5 trillion universe, there are still significant barriers to entry, with a complexity that mandates experience across corporate lending, real estate lending, and structured credit. (See Figure 1.)  
 

Figure 1: Private Credit Involvement in ABF Is Nascent

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Source: Oliver Wyman estimate¹  
 

Defining Asset-Backed Finance

A form of private credit, backed by pools of contractual assets (e.g., loans, leases, and mortgages), as opposed to individual companies.

Unlike standard corporate lending, ABF pays back principal continuously, rather than providing a large principal repayment at maturity.

Underlying assets in the ABF universe reflect the breadth of the global economy, ranging from aircraft leases to credit card receivables to music royalties.

Endnotes
1 Oliver Wyman, Private Credit’s Next Act, April 2024. The $5.5 trillion figure represents the U.S. asset-backed finance market, excluding real estate.

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