Asset backed lending
People - Investing
Saturday, 07 July 2007 15:17

Asset backed lending (ABL) is a strategy where an investment fund gives a loan that is covered by assets. This should be a short term loan of typically at most 70% of the value of the asset. The total amount of loans divided by the total value of the assets is called the Loan to Value Ratio (LTV) of the fund.

Usually the borrower tries to go to a bank first, since the bank will normally offer a better rate. But sometimes the borrower has an opportunity that will be there only for a couple of days. Banks usually take longer to decide before they give the loan than a true ABL fund: the employees of such a fund work on Saturdays and Sundays if necessary. A good ABL fund also has better asset valuation experts than most banks. So if the bank does not decide fast enough then the ABL fund "wins" the loan. The borrower might try to save costs by later refinancing the loan with money from the bank.

Investments in such an asset backed lending fund are usually not correlated with other investments. For instance if the interest rate goes up, then the prices bonds and equity investments both go down. The ABL fund is not unaffected by the interest rate increase because it only does short term loans. This is a great advantage if you want to diversify your portfolio. Another advantage is that the volatility of ABL investments is lower than the volatility on for instance equities.

If you want to invest in an ABL fund, you need to be careful not to become a fraud victim. For example never invest in a fund that is operated by just one person - apart from the secretary. Never invest in a fund that does not publish its holdings on a regular basis, say at least twice a year. Do not invest via small intermediaries.

Like with all fixed income investments asset backed lending can finally carry a currency risk.