NANS = No Assets, No Security
NANS is the inverse of HALO (Hard Assets, Low Obsolescence).
NANS has become the fastest growing component inside ABF portfolios.
NANS describes unsecured consumer lending programs such as Buy Now Pay Later, Student Loans, Personal Loans, and Credit Card receivables.
Private credit managers now hold over $200 billion of consumer unsecured exposure, representing more than a 100% jump in 5 years. No hard assets back these consumer loans, no lien against property, and no right for repossession. When a consumer loans defaults, loss severity is typically 75% to 95% of principal.
The TAM for consumer credit is large, the going-in yield is high, and access to this credit is not typically provided by banks since banks target high FICO score borrowers. The lower end of the market is therefore easy pickings for private credit managers running ABF programs.
Consumer data tells a mixed message where consumers with the strongest credit history are performing well, while those with weaker credit profiles are deteriorating. Credit card delinquency rates for non-bank, non-prime borrowers are ~15%, well above its historical average, on record balance for credit cards of $1.3 trillion. 41% of BNPL users report at least one late payment. Student loan DQ rates for non-prime graduates have soared to a record level of ~15% now that the payment holiday is over, and reporting has resumed. Consumer loans show an equally troubling pattern for non-bank, non-prime borrowers.
ABF is able to capture this adverse selection process that do not pass the lending standards established by banks. Banks keep the top of the credit stack, prime borrowers with 700+ FICO scores, where underwriting standards are tight and credit worthiness is the main determent for securing financing. Private credit is increasingly funding the loans banks declined, subprime and near prime consumers under 680 FICO, at the exact moment household are feeling increased strain.
As you know, I strongly recommend ABL, not ABF; Investment managers should ask these three key questions:
1) What happens to loss rates under a downside macro scenario?
? 2) Is the “extra yield” real return, or is it just early payment for credit losses that have not yet shown up?
3) What is the better risk-reward, NANS or HALO?
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