Asset-backed finance is growing fast and drawing new scrutiny

Core Insights - The First Brands Group bankruptcy highlights the rapid growth of asset-backed finance (ABF) within the private credit sector, which has now surpassed $6 trillion, making it larger than the combined syndicated loan, high-yield bond, and direct lending markets [3][4]. Market Overview - The ABF market is projected to exceed $9 trillion by 2029, with KKR noting that while direct lending fueled private lending growth in the past decade, ABF is now gaining attention due to its attractive yields and diversification benefits [4]. - ABF is characterized by lending against specific assets or income streams, which is perceived as less risky compared to direct lending [3][4]. Risks and Concerns - Experts warn that the influx of capital into private credit and ABF has led to lower lending standards and the use of increasingly exotic assets as collateral [5]. - The First Brands case illustrates potential issues, as the company reportedly pledged the same receivables to multiple lenders, raising concerns about due diligence practices [5][8]. Due Diligence and Future Outlook - Rigorous due diligence is essential in ABF lending, as lenders must understand both the business model and the specific collateral involved [7][8]. - The rapid expansion of ABF and the significant capital influx may lead to more problematic loans, especially in the event of a credit downturn [9].