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Ryan Hesketh

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Asset-backed lending, already hot in the US, is very much a focus in Europe too. It’s not an oddity, it’s actually all around us, and it never plays second fiddle, according to Crayhill Capital Managing Partner Carlos Mendez. He’s been touring Europe educating investors on the merits of this kind of lending and took the time to talk 9fin’s Ryan Hesketh through its current status and where it's headed.

Fundamentally, it’s exactly what it says on the tin. We make loans, which segregate a business’ assets, and finance those assets on the basis of their performance. The performance of the assets is the most important thing, so it’s the assets we pay attention to much more specifically than other private credit providers. But we do all kinds of things, supply chain finance, finance receivables, look at real estate, and we’re into energy too. Asset-based lending is applicable for many types of companies and sectors.

2. You’ve been pitching to European investors, how’s that been?

Good. European investors are behind where the US is on this right now. But the reception has been good. We do have existing partners in Europe but there’s still a steep learning curve so it makes sense for us to be a part of that discussion.

3. How are your deals structured differently from traditional private credit?

It all comes down to the assets and our control of them. There’s never been such a thing as ‘cov-lite’ in our business. We’ve seen a lot of other people tightening up their terms as the power’s moved back to lenders, but we haven’t had to do that. Our terms are exactly the same as they’ve always been. That’s because we want to be sure that we can get the best out of the assets that we’re backing. We’re belt and suspenders, it's the straitjacket approach.

If things go wrong we have the right to bring in another servicer, typically the sponsor is a servicer, and we have the right to change them. Fire them. If the assets aren’t generating enough cash, we have the ability just to take them. Take the assets and just amortise.

4. What are some of the attractions right now?

We’re living in a golden age right now. We’re getting paid more and banks are retreating from the space. There weren’t many here to begin with. Some hired specialist teams to do what we do but they’re retreating like it’s 2009. But at the same time, the fundamentals are good. People are still going out and buying stuff, the economy is still moving, so companies still need money and their underlying assets are still capable of producing it. But capital structures all over the place are screwed up because of rates right? And so it's great for a party like us. We can kind of come in and provide these types of solutions at a great price.

Despite all the talk of recession, there hasn’t been a big ‘credit event’ yet. Are people still driving the trucks whose leases we financed? Yes, maybe a little less, but yes. Are people still listening to music which we did royalty financing for? Yes they are. That’s not going to hold forever, but will it be a minute, an hour, a year? I don’t know. We'll see expected losses for assets.

Look at real estate. In the US it’s all going to refinance in the next 20 to 24 months. And there's nowhere to go right? Banks can't do it. Securitisation markets are closed. So how is that all going to get funded right? And so it's one of those spaces where you're just like, wow! This is a unique moment in time.

6. What sectors are particularly active for you at the moment?

For us, the two busiest sectors have to be renewable energy and real estate. One is really on the up, the other is struggling. It’s all about the Inflation Reduction Act [of 2022]and rising interest rates. In energy, the IRA has given so much stimulus to anything renewable. We’re already busy in the solar and battery sectors, as well as some transmission. We only see this growing. In real estate it’s a very different picture. People made assumptions based on a low interest rate environment and that’s out. Rates rising as quickly as this, a lot of people need to change their capital structures or need new finance. Both areas are very busy currently.

7. What’s happening in renewable energy?

This is how we tend to work in renewables. Say someone goes out and puts a solar panel on their house and they lease it or put it on their mortgage or get a power sharing agreement. However, that's done, 95% probability that's not being done with bank capital. It’s going to be us.

Right now, the sector is just rallying like crazy. Solar panels, land projects, you name it. Power is a commodity right? So there’s a lot of inflationary activity and it trickles down to what people will actually pay for power. Of course, so much is happening after the inflation reduction act. We’re hoping to move into new sectors, leveraging our experience with energy so far. That includes things like sustainable aviation fuel, EV charging, hydrogen, plastics handling etc. Europe looks like it’ll follow the US in a sort of IRA+ so we’ll see massive amount of growth of all these industries there too.

We facilitate capital to specialty finance companies, non-bank lenders, leasing companies. Things like that need a balance sheet in order to do that lending, And as rates go up, everything’s changed. You might’ve had a senior mortgage financed at like Libor, plus 200. Now it’s Sofr plus 600. Suddenly the building's fully leased, but the mortgage is just gonna suck all the cash out of the equity. It’s going to take the whole thing.

We’re seeing situations where bank loans are rolling over but the bank doesn’t want to roll over, so we provide an alternative. Almost like a bridge solution for a couple of years. We provide the balance sheet for that because banks are stepping out. Then, there’s other situations where an existing capital structure is already set up. But now, due to rates, it doesn't work. It's more recapitalisation, restructuring, refinancing etc. We're focused on trying to help people through those recaps but in the short to medium-term it’s going to get worse rather than better.

9. People stand to lose a lot in real estate, does that affect your work?

There's a tremendous amount of capitulation that has to happen in those situations, and so they take some time. Nothing’s quick. We’re trying to provide a solution to the borrowers, to be the white knight here, albeit at a cost.

We have gone through a historical level of interest rate rises. Maybe people should’ve prepared for it, maybe not, but it’s hitting hard. There’s a lot still to play out in the real estate space, but there’ll be opportunities at the right time and at the right price for lenders like us.

9Questions — Carlos Mendez, Crayhill — ABL, it’s all around us

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