Anecdotes on Specialty Finance

Mezz debt is, almost by definition, lending to companies that banks won't/can't fund any more so borrowers are at real risk of having problems if the economy falters. You can look at the sectors results during the 08 - 09 timeframe to see how credit bubble lending worked out -- AINV is a case study worth reviewing.

I had lunch with an ex-specialty finance lender yesterday and heard a surprisingly bullish story from him, especially considering he'd quit the field, repulsed by its excesses during the go go years.  He didn't have an axe to grind or product to sell either, so I considered it a fairly neutral viewpoint.

He told me that there are some differences between survivors practices today that may give a little more comfort:

• originators have now seen a down cycle
• loans generally 3 years in maturity but unlike banks generally have to be marked to market even if performing
• be alert to deteriorating credit profiles if lots of consent agreements (for fees of course) are being signed.  this is analgous to a credit card co. collecting late fees from dodgy borrowers...when what they really need to be doing is pulling the line immediately to minimize the losses that are accruing silently.
• more lending taking place at the senior secured loan position as banks pare back their lending into the real economy
• loans originated in recent years have much tougher covenants (personal guarantees etc. for principals) and more sober ratios
• much less competition to lend to middle market America