BasePoint Advisors is now in the market with a private rated note-feeder transaction following one completed late last year, providing institutional investors access to its short-duration, asset-based lending strategy that resembles private collateralized loan obligations (CLOs). It also opportunistically issues asset-backed securities.
BasePoint lends primarily to privately owned originators of short-term financings for consumers, small-businesses, fintechs and equipment leasing platforms. It targets unlevered net returns of 10% to 13% for institutional clients including insurance companies, pension funds, and family offices.
The company was founded in 2009 by investment professionals including several who had run Morgan Stanley's warehouse finance and conduit lending businesses, before the Dodd-Frank Act pushed banks out of the specialty finance business. They structured the new firm's technology and operations system similarly to the investment bank's, so it functions more like a merchant bank than a traditional asset manager, said Angela Kay, president of BasePoint Advisors, the registered investment advisory affiliate.
Tight control over borrowers' originations ... enabled it to navigate the COVID shutdown without losses.
That technology system, including a proprietary database of historical loan performance data going back 15 years and overseen by 20 data scientists, enables BasePoint to fund borrowers daily and apply margin calls every five days. That compares, Kay said, to most asset managers funding every two weeks and "truing-up" the borrower basis every 30 days. The tight control over borrowers' originations, she said, enabled it to navigate the Covid shutdown without losses.
In an interview with Asset Securitization Report (ASR), Kay, who left ICE Canyon as a managing director to join BasePoint in 2020, explains how the assets BasePoint Capital ultimately underwrites and closely monitors are likely to withstand financial and economic turbulence.
ASR: When does BasePoint Advisors issue note feeders?
Kay: Insurance companies and pension funds can face punitive capital charges investing in private credit in traditional fund formats, but a privately rated note is less punitive. So we have rated a portfolio substantially mirroring our commingled fund's portfolio, and then tranche it out so investors can purchase the senior part of the capital structure, which would have an A-rated coupon associated with it, and a junior tranche with a lower-rated coupon. Then there's an equity piece, just like in a CLO. BasePoint essentially applies CLO technology to an asset-backed finance strategy.
ASR: How does that work?
Kay: BasePoint originates loans in the $200 million to $500 million range, generally as the sole lender of record. We require the borrower to pledge a portion of its eligible receivables to serve as the first loss piece, similar to a CLO equity tranche. Then we structure a thick mezzanine piece, of which BasePoint's balance sheet generally takes up to the first 5%. Our limited partners and other participants, including other credit funds, participate in the senior portion of the mezzanine tranche. So if there's an impairment, first the loan originator loses 100% of its capital, and then BasePoint loses its principal and interest before our clients are ever touched.
Also similar to CLOs, the loans we originate all have predetermined credit-buy -box diversity requirements, including sector, state and FICO score diversification.
ASR: When do you issue more broadly distributed asset-backed securities (ABS)?
Kay: We've done two securitizations of our small business lending business. BasePoint Advisors' private funds business gets first priority on everything we originate. To the extent we have collateral available and if the financing markets look interesting, then we go out and securitize.
ASR: How does BasePoint mitigate its exposure risk?
Kay: Daily or weekly our borrowers send us their daily data files. We require them to send us their full transaction file. We may be financing a product in existence since 2023, but if the loan originator's inception date is 2013, then we require its data files since inception. We use that data to predict patterns of behavior over a full market cycle and to build in performance-based triggers. We have the discretion to kick out single line items and entire sectors. That ability to risk manage in real time has really been the foundation of our track record, and it has resulted in us passing on opportunities such as First Brands (which filed for bankruptcy last September).
ASR: How so?
Kay: BasePoint was presented with the opportunity to provide financing to First Brands' third-party servicing and factoring company, which failed our initial underwriting/screening process. We requested comprehensive data targeting all historical receivable originations, and an accompanying transaction file capturing all historical cash payments, balance-sheet adjustments and other non-cash items. It provided only summary-level information, which we deemed insufficient to process and validate historical portfolio performance.
More than 90% of borrowers have deepened their relationship with BasePoint through upsizes, renewals, or additional facilities.
ASR: Given BasePoint's data and control requirements, what draws borrowers to your firm?
Kay: Our expertise enables us to address complex collateral and transaction structuring needs and to offer full capital-structure financing solutions. Oftentimes a borrower will look at its borrowing base one way, and we can suggest a different way based upon all the other deals we've lent against. More than 90% of borrowers have deepened their relationship with BasePoint through upsizes, renewals, or additional facilities.
ASR: What is BasePoint's lending strategy?
Kay: We finance portfolios of short duration, high cashflow, self-liquidating receivables. We seek to finance loan originators who provide financing to blue-collar workers for non-discretionary purposes, and to small businesses for short-term cashflow needs. Sixty percent of the U.S. population can't handle a $400 shortfall, so to cover a $1,500 bill to fix their car they'll take out a line of credit or installment loan from one of BasePoint's borrowers and pay it back over an approximately five-and-a-half month period.
On the small business side, if you're a local auto shop and your forklift breaks, you may choose to sell a portion of your future revenue in exchange for $50,000 today, and you'll pay back about $62,000 over a 12-to-18 month period. We've also seen opportunities in debt settlements and equipment leasing. We can lend against anything that's short duration with stable cashflows.
We can lend against anything that's short duration with stable cashflows.
ASR: How do those assets perform in times of market stress?
Kay: If you went back and looked at 08, the data would show you that this market sector has a much less volatile repayment history. We've generated a stable coupon regardless of what's happening in the macro environment. The end-borrowers typically behave as if they're operating in a recessionary environment, and we've modeled our loans that way, with a lot of cushion.
Our strategy has been generally uncorrelated to the macro environment. In times of recession, people still eat pizza and need to fix their cars. Plus, the end-beneficiaries of these loans are not leveraged to the stock market and their jobs are not vulnerable to AI or other current macro issues. In the current environment, the one that you would think could impact them, which we haven't seen yet in our data, is higher gas prices.
