Specialty finance companies out for funding diversity
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Specialty finance companies out for funding diversity

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Issuers need alternatives beyond the securitization market, say panelists at DealCatalyst event

After challenged arbitrage in the securitization market for most of last year, and given banking sector turmoil earlier in 2023 and the greater variety of private institutional funding providers, a diverse set of funding sources is more important than ever, said panelists at DataCatalyst’s US Specialty Lender Finance conference in New York City on Monday.

“What we've been seeing is that it's not just a one size fits all any more,” Howard Schickler, partner at law firm Katten, during a panel discussion on the evolution of the banking landscape. “It's not like you have a bank facility or you have a private credit facility or you’re just a securitizer. Everyone's doing everything.”

Historically, the typical funding path for finance companies has been to raise equity, put a warehouse line in place, and — if they were large enough and had a long enough track record — ultimately to securitize.

But this dynamic is changing a little bit, particularly in today's market where “equity and junior capital are harder to come by [and] much more difficult to raise”, said Matt Biczak, managing director at Fortress Investment Group, on a morning panel about the future of specialty lender finance.

“I think companies are out there looking to diversify their funding options,“ Biczak said. “Even the largest issuers of securitizations are exploring hybrid models where they have on-balance sheet financing and they have an off-balance sheet financing.

“They are entering forward flows, venturing into overflows.”

And specialty finance lenders are getting more creative to provide more comprehensive financing solutions, according to Biczak.

Although public ABS markets have been broadly open for most of 2023, panelists argued that having access to the ABS market was not something to be taken for granted.

“If you go all-in on securitization and the securitization market freezes, you need to have a back stop,” said Biczak. “I think borrowers need to think about how they set up their financing sources so that it also works in a number of different scenarios.”

Ray Chan, partner at Atalaya Capital Management, was also on Biczak's panel. “If capital is the life blood of your business, of your company, you need a diversity of capital solutions,” he said.

The different funding solutions include different credit structures, mezzanine facilities, and unitranche facilities — in which a bank takes a piece and a credit fund provides the mezz credit, said Schickler at Katten.

"More and more people are looking to diversify the types of credit they have with the interest rate environment that we're in,” Schickler said. ”They're not securitizing as often.

“Probably the biggest change I've seen in the last couple of years [is] funds are going out and financing their entire credit portfolio and looking into the banks or other institutions to provide credit based on the current net asset value of their portfolios.”