Credit Markets in Transition: Asset-Based Finance

You're listening to All the Credit, a monthly podcast series brought to you by PGIM Fixed Income, an active global fixed income investment manager. Welcome to All the Credit. I'm Brian Barnhurst, global head of credit research. Today's episode is the first in a series that will explore credit markets in transition. We're going to focus on the fast growing and headline grabbing world of ABF, asset based finance. I'm fortunate to be joined by longtime colleague, co head of structured products, Edwin Wilchins. Edwin, great to have you on the podcast. Thanks so much, Brian. I'm really looking forward to the discussion today. So to start, ABF is a bit of a catchall. How do you define it? Sure. So ABF or asset based finance can feel a bit like a all encompassing label, and that's likely because the addressable market references trillions of dollars. At its core, ABF refers to lending that is secured by a specific set of assets that generate contractual cash flows. This can include consumer assets, such as auto loans, credit cards, student loans, and can include hard assets coming from commercial sectors like transportation or digital infrastructure. It includes financial assets such as inventories or receivables or even sectors like fund finance. It even includes things like mortgages. Now you might say that sounds an awful lot like what we call securitized products, and that's because it is. Generally, the ABF label is used for private market investments that our teams are directly originating from issuers. PGIM has been investing in securitized products since the nineteen nineties. Being the dad that I am, I like to joke that what is old is new again, kinda like ripped jeans and bell bottoms. In the late nineties, we were the first investors in the securitization of intellectual property rights of David Bowie and what became the first music royalties deal, which in the last few years has once again gained popularity as the new hot subsector of ABF. So really putting all that together at PGIM, we think it makes a lot of sense to have one securitized credit team focused on what we simply think of as asset based finance, whether that's public or private. If I think about the evolution of this market, some things about the development of ABF are very obvious. Changes in regulation post GFC, changes in the behavior of banks naturally creating opportunities for others in the marketplace. On the other hand, it feels to some degree as if the excitement and the attention around ABF came a little bit out of nowhere in the last couple of years. So why is ABF garnering so much attention now? What are the attributes that have really captured the attention of both market participants and investors? Yeah. It is really a confluence of multiple things happening at the same time. So on one hand, as you mentioned, there is a secular change in how bank balance sheets are calibrated due to, …