Asset-Backed Debt Offers Direct Lending Yields With Less Risk

What's New

Asset-backed finance can match the income of corporate direct lending while taking less credit risk. Apollo makes the case in The Strategic Case for Allocating to Asset-Backed Finance. The firm says loss-adjusted spreads in private ABF are in line with corporate direct lending. More than 65% of its private ABF is investment grade or investment-grade-like. Corporate direct lending is mostly sub-investment grade. The swap keeps the income target and raises credit quality.

Why It Matters

Most private credit books are loans to sponsor-backed companies. Each loan depends on one borrower's enterprise value and repays in a single payment at maturity. When earnings fall or multiples compress, those loans reprice together. Spreading money across more direct lenders does not change that exposure. ABF repays from contracted cash flows on pools of loans, leases, and receivables held in bankruptcy-remote vehicles. The originator's balance sheet does not decide whether the lender gets paid.

By The Numbers

• 75% is the loan-to-value a corporate loan reaches when enterprise value falls by a third. The lender started at 50% and lent nothing more.

• 3 years is the approximate weighted average life of private ABF. Corporate direct lending runs about 5 years.

• $20+ trillion is Apollo's estimate of the ABF market, from mortgages and auto loans to aircraft, equipment, and music royalties.

• 6 sectors make up Apollo's map of the market: consumer finance, residential mortgage, commercial mortgage, hard assets, financial assets, and capital solutions.

Zoom In

Apollo points to four things that shape how an ABF allocation behaves.

• Breadth. A single-sector mandate ties returns to one market, such as housing or aviation. A multi-sector mandate lets the manager move capital to whichever sector offers better terms.

• Attachment point. The same rating can carry very different protection. Mortgage-backed deals need less subordination than CLOs because mortgages have historically recovered more. Subprime auto deals need more, because borrowers are weaker and cars lose value.

• Credit enhancement. Allocators comparing tranches should compare subordination directly, since the rating alone hides the difference.

• Sourcing. The closer an investor gets to the origin of the asset, the more excess spread it captures, Apollo argues. Direct origination also lets the lender set underwriting terms and structural protections.

The Wrap

ABF works best as a funded move out of corporate credit, where it shortens duration and spreads repayment across households, property, and equipment. Its case rests on collateral pools that weaken at different times, and on managers who underwrite each pool on its own terms. A recession that hits consumers and businesses together would strain that diversification. Newer collateral, such as GPU and data financing, adds risk because it has little loss history. The next credit downturn will be the first full test.