(Bloomberg) -- Private lenders have spent the last five years making ever larger loans to junk-rated companies, grabbing leveraged lending deals away from banks. Now the direct lenders are muscling in on funding consumer loans, cutting into banks' asset-backed securities business.
Castlelake LP, a private credit firm, said it participated in a more than $140 million financing for consumer lender LendingPoint this year, backed by personal loans. Hyland Hill Investment Partners has set up a $250 million fund to buy debt including consumer and small business loans from finance companies. Atalaya Capital Management has recently set up a $1.8 billion fund to target private asset-backed securities as well.
For direct lenders, these asset-backed financings represent a new market to profit from. Private lending to companies has become more crowded as the credit funds have grown into a $1.4 trillion behemoth. An industry where a loan might average around $100 million a few years ago can now help provide $5.5 billion of funding for a leveraged buyout, cutting into the traditional banking business of syndicating leveraged loans.
"Corporate direct lending used to be a small part of the loan universe a few years ago and we think it accounts for roughly 50% of leveraged lending markets now. It's the asset-backed markets' turn now," said Isaiah Toback, deputy co-chief investment officer at Castlelake, said in an interview.
For the consumer finance industry, direct lenders offer almost guaranteed funding at a time when borrowing in the $1.6 trillion US asset backed securities markets is increasingly unpredictable, and banks nurse losses on many types of loans.
American Car Center, a used car dealer and lender, had to shelve a planned sale of bonds backed by subprime auto leases this week, according to people with knowledge of the matter. ABS sales volume is down 9.2% this year from the same period last year, and the average yield on the securities has climbed about 1.5 percentage points to 5.2% over the last six months.
"Oftentimes consumer lenders don't have the luxury of waiting for the bond market to recover. The loans they give out are short term and they need to finance them," said Ivan Zinn, chief investment officer at Atalaya Capital, in an interview.
LendingPoint, which makes consumer loans online, had regularly borrowed in the asset backed securities market, including a roughly $310 million offering in September, and a $250 million sale in June. Both of those transactions were led by Credit Suisse Group AG and JPMorgan Chase & Co. Inc. LendingPoint had also borrowed in the private market previously, according to a representative.
"We expect to be in market again with larger, rated transactions in the next few days or weeks," the representative said in an emailed statement.
For years, banks made most loans themselves, and about four decades ago, they started packaging their own loans, and others', into bonds, building the securitization business. Cutting out banks from the equation may be the next step.
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"This is a natural progression of private credit," according to Castlelake's Toback. "We believe private credit will be as penetrated in the asset-backed space as direct lending is in the corporate market."
--With assistance from David Brooke.
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