ThinCats, a Leicestershire-based mid-sized SME financing provider, has secured just shy of £700 million (£696 million) in a warehouse facility with Citi and Barclays Bank, ultimately supported by a guarantee via the British Business Bank’s Enable Guarantee programme.
The facility is aimed at further supporting UK-based mid-sized SME/SMBs.
A warehouse facility is a transaction that involves the accumulation and custodianship of bonds or loans that will become securitised through a collateralised debt obligation transaction. In turn, a collateralised debt obligation (CDO) is a rather complex structured-finance product backed by a pool of loans and other interest-bearing assets.
If all of this sounds a bit risky, it is. CDOs first entered the public domain back in 1987 via the now-defunct investment bank Drexel Burnham Lambert, and powered by senior executive Michael Milken, then and now affectionately known as the "junk bond king", who was indicted for racketeering and securities fraud in 1989.
The Drexel bankers created these early CDOs by assembling portfolios of junk bonds, issued by different companies. CDOs are called "collateralised" because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
This is not to say that the financial mechanism itself is entirely built on stilts, however, CDOs don’t have the greatest track record. Fast forward another two decades, and while not entirely responsible for, CDOs were the driving force behind the financial crisis of the late 2000s via mortgage-backed securities (MBSs). Fast forward another two decades and ...
Different this time (?)
Where the British Bank’s Enable Guarantee programme steps in is that it allows banks and similar lenders to up their lending to smaller businesses by lowering the amount of capital or junior funding required to make such a loan. With the Enable Guarantee, the UK Government assumes a portion of the risk in such a transaction in return for a fee.
On the transaction, British Business Bank’s managing director, Guarantee and Wholesale Solutions Reinald de Monchy shared:
“We are very happy to be part of this innovative transaction with ThinCats, which is the first of its kind under the programme to involve a direct guarantee on a portion of the liabilities in the funding structure. The guarantee will benefit mid-sized businesses across the UK by increasing available funding, which will support wider economic growth.”
Update (11:28 CEST, September 25, 2023): Following further clarification from ThinCats, they are also a balance sheet lender and as part of these warehouse structures, have significant amounts of our capital at risk and are therefore incentivised to write good quality loans.
As per ThinCats' Managing Director Ravi Anand, a CDO invests in tranches of ABS, not directly into assets an historically where the manager has limited capital invested. A better comparison is a CLO, which invests in loans but is typically more levered than a private warehouse.
Lead image: Photo by James Giddins