Business Case Studies & Business Publications

Asset-Backed Securities

Allayannis, George...

Technical Note

Asset-Backed Securities

Allayannis, George (Yiorgos); Malhotra, Sumit; Varma, Alankrit

F-2116 | Published July 24, 2025 | 13 Pages Technical Note

Collection: Darden School of Business

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This technical note examines key considerations involved in the decision of whether to invest in a credit facility backed by underlying assets, such as a fintech's loans to consumers. When evaluating the proposed transaction, the lender will need to examine (1) the underlying assets (the fintech’s loan portfolio), (2) the fintech’s prospects (e.g., growth, profitability), and (3) the market conditions. The underlying assets generate the cash flow required to pay the lender its due interest and principal, so the first step for any asset-backed transaction is to fully understand credit risk, which involves understanding the underlying consumers and their behavior. Once the lender understands the assets to its satisfaction, it evaluates the fintech’s growth risk, financial risk, operational risk, and the terms of the transaction. The structuring of the transaction involves a special purpose vehicle, which isolates the cash flows from the loans to be used to repay the lender. The note includes an appendix that lays out a simplified methodology to estimate the advance rate (the percentage financed by the lender versus the percentage financed by fintech’s equity) and the loss coverage. This technical note is to be used along with the case, “Structuring Private Asset-Backed Debt” (UVA-F-2115). At the University of Virginia Darden School of Business, it is taught in the second-year elective “Financial Institutions and Markets”; it would also be suitable in courses on private capital and private markets.