Not All Collateral Is Created Equal.

Part Two of Three: What We Lend Against

 

 

In Part One, we talked about the capital stack and why position matters. Senior secured lending gives you the first legal claim on a borrower’s assets. But that claim is only as good as the assets behind it.

 

This is where a lot of private credit conversations stop short. Investors hear “senior secured” and reasonably assume that means protected. Sometimes it does. Sometimes it means you have a first claim on something that turns out to be worth considerably less than you thought, at precisely the moment you need it most.

 

The collateral behind the loan is the real story.

 

 

Two loans can look identical on paper and behave very differently in a stress scenario.

 

 

Imagine two senior secured loans, both at a 60% loan-to-value ratio, both paying current cash interest, both to businesses with reasonable operating histories. One is secured against a portfolio of accounts receivable from creditworthy customers. The other is secured against the enterprise value of a business whose revenue is concentrated in a handful of long-term contracts.

 

On a term sheet, they look similar. The difference only becomes visible when you ask what you actually own if something goes wrong.

 

The receivables loan has something concrete underneath it. Real invoices. Real customers. Money that is contractually owed and collectable. The enterprise value loan has a set of assumptions about what the business is worth. And the value of assumptions can get tested at exactly the wrong moment.

 

 

We lend against assets we can kick.

 

 

This is not an official underwriting criterion, but it captures something real; equipment, accounts receivable, inventory, real estate, loan portfolios. Assets that exist in the physical world, can be appraised independently, and hold a recoverable value regardless of how the borrower’s business is performing.

 

Our job is not to predict the future. It is to structure loans so that if the future disappoints, we have already accounted for it.

 

Before we lend against any asset, we assess its liquidation value. Not its book value, not its replacement cost, not what the borrower says it is worth. What it would realistically return if we had to sell it in an orderly process. We then advance against a conservative percentage of that value and place a perfected first lien on the asset so there is no ambiguity about our claim.

 

Our loan-to-value ratio has historically ranged between 50% and 70%, currently sitting at approximately 54.7%. That buffer exists for the scenarios nobody wants to think about.

 

 

Not all assets are equal, and some require more attention than others.

 

 

Understanding collateral is a skill that takes time to develop. A fleet of commercial vehicles depreciates differently than a portfolio of receivables. Inventory tied to a single customer carries concentration risk that raw materials do not. Real estate is appraised on assumptions about use and market conditions that can shift. Receivables that look clean on the surface can carry hidden considerations if the underlying contracts have provisions that allow the end customer to dispute or offset payment.

 

The risks that matter most in this business are rarely the obvious ones. They tend to live in the details of an agreement, in the composition of a receivables book, in the market depth for a specialized piece of equipment if you ever had to sell it quickly.

 

This is why we do not just take collateral. We study it. We understand how it performs over time, what it looks like in a wind-down, and where the things that were not obvious on day one tends to surface.

 

 

Control and proximity matter as much as the asset itself.

 

 

Having a first lien on an asset means little if you cannot access or monitor it. We require verifiable collateral, enforceable security, and ongoing visibility into the assets and cash flows we are lending against. Where appropriate, we control bank accounts and require regular reporting, so we are never relying solely on what a borrower tells us.

 

Field examinations, conducted one to two times annually by independent examiners, give us an audit-level view of documentation and controls. We rotate examiners deliberately. We vary our testing methods over time. Not because we assume bad faith, but because good systems do not depend on it.

 

 

Historical Credit Impairment Rate.

 

 

Since 2015, our annualized credit impairment rate has averaged well below 1%, including through COVID, rising rate cycles, and periods of meaningful economic stress. In a few years, net recoveries actually exceeded write-offs, producing a negative impairment rate. That track record is a direct consequence of how seriously we take the collateral behind every loan.

 

 

The luxury of being selective.

 

 

One of the structural advantages of operating in the sub $20-30 million loan size market is that we are not competing with the large direct lending platforms for deals. That means we are not under pressure to loosen standards to win mandates. We review fifty to one hundred and fifty opportunities every month and fund a small fraction of them.

 

 

 

 

The ones we pass on are just as important as the ones we approve. Choosing not to fund is a discipline most managers find difficult when capital is waiting to be deployed. We think of it as one of our most important skills.

 

 

Final Thought

 

 

Senior secured matters. But senior secured against the right assets, at the right advance rates, with the right ongoing oversight, is a different proposition entirely.

 

In Part Three, we will address the question investors rarely ask until they have to: what happens when a borrower defaults? The answer, in our case, is built into everything we have described across this series.