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The bankruptcy of First Brands Group has shone a spotlight on one of the fastest-growing sectors of private credit: asset-backed financing.
Asset-backed private financing, or ABF, involves lending against a specific asset, income stream, or loan rather than lending to a business based on its cash flow. According to KKR, the private ABF market has doubled since 2008 to reach more than $6 trillion today – more than the market for syndicated loans, high-yield bonds and direct loans combined.
The ABF market is expected to exceed $9 trillion by 2029, according to KKR. In a report, the global investment firm said that while direct lending may have fueled private lending growth over the past decade, ABF is now “taking a similar path, attracting attention with its historically attractive yields, diversification benefits and broad market size.”
Asset-backed financing is often presented as being less risky than direct lending. As banks have withdrawn from the ABF since the financial crisis, direct private lenders have flocked. A lender often groups ABF loans into pools, guaranteeing everything from financial assets (accounts receivable or consumer loans) to hard assets like planes, warehouses or even music royalties. The pooled approach aims to provide a safer and more diversified loan portfolio.
Yet some experts say the influx of capital into private credit and ABF strategies has led to falling standards and increasingly exotic assets being pledged as collateral. First Brands, the auto parts maker, borrowed against its receivables or money owed by customers. In bankruptcy filings and lender disclosures, some lenders claim the company may have pledged the same receivables to different lenders.
While several private credit companies, like Apollo, spotted potential problems at First Brands and even reduced credit before the company filed for bankruptcy, others failed to notice the red flags.
Donald Clarke, president of Asset Based Lending Consultants, said ABF is a “high-risk, high-return” loan that requires particularly rigorous due diligence.
Not only do lenders need to understand the fundamentals of the business and the complete business model, like traditional lenders, but they also need to understand the specific collateral being pledged.
“The First Brands debacle demonstrated the lack of due diligence on the part of lenders – banks and non-banks – who rushed to deploy capital,” Clarke said.
Given the ABF’s rapid expansion and billions flowing into private credit, he said he expects more problem loans to emerge – especially if credit slows.
“The race to deploy capital must be moderated by the need to exercise due diligence on the borrower and the collateral offered,” he said. “Where there is a lot of money to lend, there is a lot of money to lose.”