Platform funding market improving?
Non-bank lending platforms have had a hard time finding new sources of funding. Instead, they’ve had to rely on existing lines of funding and we’re seeing those run out of steam. Funders have been cautious due to spiking interest rates and economic uncertainties that have increased expected default risks.
But what do you do now that interest rates are taking a dive? Will platform funding become attractive again? Particularly the long end of the curve has been bought recently in anticipation of an interest rate cut next year. This inverts the curve more than we’ve seen in this rate cycle. The marked area in the graph shows the bond rally in the past month in Dutch government bonds. The same can be seen in other bond markets.
The story is about more than interest rates. Funders have been cautious of private debt and credit in anticipation of higher default rates on such credits, or a hard landing if you ask an economist. As a consequence, they priced their funding lines much higher. Lending platforms, on the other hand, were having trouble selling credit at higher rates and thus paying the higher funding rates. This dislocation caused new funding activity to drop significantly.
So now we don’t seem to be getting a hard landing. Instead, we’re seeing a rally in Interest rates, particularly in the longer end of the curve. Will a rally in credit spreads ensue in its wake? We believe so. Judging by the iTraxx Europe crossover index (which tracks riskier corporate credit spreads), this rally has already begun.
That means it’s time for non-bank lenders and lendtech firms to tend to their platform value, brush up the pitch books and, yes, hire an advisor to meet the funders who understand your markets.
Let’s end on a note of caution. Many lendtech and non-bank lenders have struggled with profitability and we believe your platform financial health will become a more significant factor in the coming years. There are many ways to spruce up your finances and value, but that’s for the next episode. Follow us on LinkedIn or contact us if you’d like to know more.