Capturing Opportunities in Alternative Credit & Debt Market amid the COVID-19 Fallout
by Radek Jezbera
Our CEO, Radek Jezbera had a chance to take part in a panel discussion alongside Jeff Toper, Theodore L. Koenig, George Souri, and Dan Clare.
Performance of Alternative/Private Credit during the pandemic
KILDE is focusing on a specific asset class within private debt - consumer lending assets. We have analysed more than 30 consumer finance lending firms in the past 6 months in Europe, Central Asia, and South-East Asia. We have seen the impact of the COVID crisis on their loan books and we have also seen that the consumer lending assets have shown much more resilience than we expected.
The situation on various geographical markets diverged strongly given government response to the pandemic, wage subsidies, and declarations of moratoriums on debt repayments. Generally, we have seen a 20 to 30% drop in cash flows from the existing consumer loan books starting from April 2020. Several lenders retreated from the market but their market share was quickly taken by capitally stronger lenders. Towards the end of 2020, the lenders started expanding their loan books again. At the same time, the cost of raising capital has decreased as well creating favourable conditions for extensive market expansion.
Opportunities in Private Credit
Banks in emerging markets remain conservative on expanding to the near-prime and subprime consumer lending assets thanks to the three factors.
1. Prohibitive customer acquisition and servicing unit cost (think branches and face to face Know Your Customer processes)
2. Relatively high Loan Loss Provisions (LLPs) required by the regulators for consumer finance loans
3. Lack of flexibility of the core technology platforms to aggregate more credit risk data points and streamline the customer experience
Alternative lending firms (NBFIs/NBFCs) are becoming systemic players in the emerging markets recognised by the regulators with various licenses e.g. multi-finance license in Indonesia. We have calculated that in 2020 alternative lending reached $400B of loans issued to consumers and SMEs while the average annual growth for the next five years will be 9%.
Technology and Its Impact on Private Credit
Technology and scalable transaction structuring make transactions for below mid-market companies possible. Thanks to technology, the credit risk team at KILDE can process the vast amount of loan book related data to establish statistically verified cash flow prediction. The same technology lets us process information about repayments for each underlying loan in the consumer lender’s loan book to monitor transaction covenants.