The securitization market's 2023 output could be described as underwhelming, or meager, even. But conditions have been a boon for New York City-based Atalaya Capital Management, which provides private structured financing to consumer and commercial specialty lenders that are too small for Rule 144A investors, and those who simply need a more reliable source of financing in today's volatile market.
Atalaya Capital Management's founder and chief investment officer Ivan Zinn launched the company in 2006. The former investment banker and private-equity executive created the asset manager and lender to be active in markets less traveled by more conventional lenders. In structured finance, that means providing the loans via bankruptcy remote vehicles to finance companies which then originate assets that include consumer loans and commercial specialty finance, such as small business loans and equipment leases. The assets' revenue streams back the loans, and the vehicle pays interest to Atalaya Capital for the life of the financing.
The firm showed its mettle when it pulled through the 2008-2009 financial crisis and began opportunistically buying assets as well. Named after a mountain peak near Zinn's hometown of Santa Fe, NM, and Spanish for "watchtower"—appropriate for an asset manager--Atalaya has deployed more than $10 billion in capital since its inception, with $2.6 billion in 2022 alone, over 58 transactions and 40 repeat clients.
Zinn recently spoke to Asset Securitization Report (ASR) about Atalaya Capital's market segment and the insights it provides regarding the broader financial markets and economy.
ASR: What role does Atalaya play in the financial markets?
Zinn: We provide private ABS financing solutions to firms that need capital, and we buy those underlying originated loans. We don't compete with corporate credit and corporate direct lending, per se, and we've tried to differentiate ourselves by being experts in asset-backed areas, particularly in the private ABS context.
Unlike a private placement where an investment banker places the debt to an insurance company or other investor, we find the assets, do the due diligence, structure the transactions ourselves, and we retain the debt.
We're not going to call you from Switzerland and tell you that your facilities are no longer valid because we can't do a securitization.
ASR: How would you describe your clients?
Zinn: These companies are not necessarily backed by private equity and can be hard to find. If they were large enough and mature enough, they could go to the securitization market and do a securitization of several hundred million dollars. The companies that only need $100 million show up at our doorstep. We might lend 80% or 90%% against that pool of credit card or other loans. We are not buying the loans, like in what's known as a "forward flow" relationship, but rather lending against the loans, effectively acting as the administrative agent and trustee of a private transaction. Private ABS is probably the simplest way to think about it.
ASR:Do clients pay a premium for these private transactions?
Zinn: Our cost of capital is higher than a similar public-market financing on the same assets. We see clients wanting to move to the public markets, but today if the company has, say, a $100 million or $200 million credit card portfolio, and its shows up in the more public ABS market for the first time, nobody is going to notice.
In addition, markets aren't functioning all that well, credit spreads are wide, and capital isn't flowing. Our firm provides a more reliable capital solution … we're not going to call you from Switzerland and tell you that your facilities are no longer valid because we can't do a securitization.
ASR:How has that impacted opportunities for Atalaya Capital?
Zinn: Our opportunity set has meaningfully expanded in the last 12 months because of the stability of our capital. Those opportunities have existed for a long time, but when the public and securitization markets are more volatile, it makes our capital that much more precious and valuable for clients. We're not providing a warehouse that we hope turns into investment banking fees or relying on a capital-markets takeout.
ASR:What are Atalaya Capital's main areas of focus?
Zinn: Consumer and small-business finance are our two main food groups. A third would be equipment leasing, where the leases range from $5 million to $25 and potentially larger. That's an esoteric area of the market that few other fund managers look at. Litigation finance would be another area at the esoteric end of the spectrum where we've been active historically.
ASR: What types of deals have been especially prevalent over the last year?
Zinn: Consumer and small-business financing, because base [interest] rates have changed dramatically, and the ABS market has functioned sporadically. A credit-card or other consumer finance issuer needs to finance those loans. Those businesses constantly need capital, because their inventory is cash and they can't run out of capital.
The number one type of transaction in the last six or nine months has been repeat or upsized transactions with our longstanding clients, because they're the winners in this environment and they need more capital to originate loans. We've had a record year of deployment.
ASR: What makes these clients winners?
Zinn: The feedback loop on consumer loans tends to be very fast, and issuers can often tell within a few months whether the pool of loans they originated as recently as January or February was a good one. They're the least risky types of deals because the company gets fast feedback that allows it to better underwrite credit in the current environment and issue new loans.
ASR: Where does Atalaya get its capital?
Zinn: Our investors are mostly institutions—state or corporate pension funds, endowments, foundations and non-U.S. institutional investors. They're paying us to originate these private ABS transactions that are several hundred basis points wider in terms of spread than the public ABS market.
ASR: What is your view on the SEC's recently issued conflict of interest ABS proposal?
Zinn: In general, more regulation and rulemaking is better for our business, because it makes it harder to issue [broadly sold] ABS securities and harder for specialty finance companies, especially, to attract capital.
ASR: Do you see the ABS market starting to open up?
Zinn: Not immediately. Eventually yes, but in the near term we expect it to be sporadically available for the types of companies we finance because they tend to be smaller and issue more esoteric loans that trade very infrequently. We will have to see the more traditional ABS come back, including CLOs, that are larger and easier to digest, before these smaller issuers come back more consistently. Those markets show signs of coming back, but it won't be anytime soon for our segment.
ASR: Do you have any final insights to share?
Zinn: We think consumer credit performance is strong. It's easy to read headlines about delinquencies ticking up, and we're not ignoring those even if the upticks are from all-time lows. But we would say the actual underlying data—the direct data feeds from our consumer and specialty finance clients—suggests that consumers are coming back and will be resilient and strong. Not something you read very often.
