What is specialty lending?
Specialty lending encompasses a range of financing options outside traditional corporate lending, focusing on both tangible and intangible assets to back loans.
About specialty lending
Primary goal: Diversify investment portfolios and manage risk by securing loans against specific assets.
Portfolio role: Specialty lending in portfolios can enhance returns through higher yields while providing diversification by exposing investors to niche sectors and non-traditional borrowers. However, this segment requires robust collateral and active monitoring to help manage risk, while the lender's expertise in niche markets adds strategic value.
- Tangible asset case study
- Intangible asset case study
Tangible asset-based lending primarily involves loans secured by real estate and physical assets like machinery and inventory, emphasizing the assets' liquidation value over the borrower's financial health.
When properly underwritten, these tangible assets can offer recession resilience, as the lender’s risk is more closely tied to the asset’s value than the borrower’s operating performance. Success in this strategy hinges on the lender’s ability to efficiently seize and liquidate the collateral in the event of default.
Tangible asset
Case study: U.S. coffee roaster
Corporate term loan
The company
- U.S. coffee roaster selling coffee, accessories and brand apparel
- Largest direct-to-consumer online coffee subscription platform
Why they required a non-bank lender
- Existing regional bank lender not in a position to upsize
- Company had negative earnings in the recent period due to heavy marketing spend to grow revenue
S+8.5%
Coupon
2%
Origination fee
3/2/1*
Prepay fees
5 years
Term to maturity
Intangible asset-based lending are loans secured by non-physical assets such as intellectual property, financial assets, and royalties. For instance, it could include lending against brand names or licensing agreements, where the value lies in future revenue streams rather than physical goods.
This form of lending requires a deep understanding of the underlying asset’s value and revenue potential, demanding expertise in fields like intellectual property law and financial asset management. Intangible asset-based lending offers investors diversification beyond traditional corporate loans, tapping into revenue streams that are less directly tied to economic cycles.
Intangible asset
Case study: Celebrity retail consumer apparel brand
First lien asset-backed loan
Background
In 2015, a celebrity sold a 62.5% stake in an eponymous retail consumer apparel brand to a corporate buyer retaining 37.5% ownership. In 2021, the buyer comes under financial pressure and goes into bankruptcy looking to sell assets. The celebrity then agrees to repurchase the 67.5% stake for $65 million. The fund manager arranges $58 million of financing in the form of an asset-backed loan bifurcated into First Out/Last Out tranches with another lender taking the Last Out Tranche.
The deal
- Structure: First lien asset-backed loan
- Deal size: $58 million (36.5m first out, 21.5m last out)
- Collateral: Intellectual property
- Loan-To-Value: 73%, based on minimum royalty contracts
LIBOR+650
Coupon
2.8%
Origination fee
4 years
Maturity
103/102/101
Prepay schedule
Source: Confidential manager, Russell Investments. For illustrative purposes only. Information as of June 2023. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.
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