Commodity Watch: Hot Dogs and the case for ABF

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" data-fr-image-pasted="true" src="/getContentAsset/e4db1c4c-2687-44cd-adbd-db1eb849e5d2/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.jpg?language=en" alt="Ahmad Al Sati" title="Ahmad Al Sati" class="fr-fic fr-dii" style="width: 180px"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Americans consumed 150 million hot dogs on 4th of July (yes, that includes the 70 hot dogs Joey Chestnut swallowed in 10 minutes to the win the Coney Island hot dog eating contest). Behind the picnics and barbecues, the pageants and festivities sits a sophisticated supply chain that seamlessly delivers our food. Meat must be procured, casings secured, and products distributed. And somebody has to finance it all!</p><p>Asset based finance (ABF) is a large (multiples larger than the corporate lending) and growing asset class that touches every aspect of our lives: mortgages, aviation and commodities. ABF allows a wide range of borrowers to obtain off-balance sheet financing, backed by the real and financial assets that their businesses depend on. The opportunity set is not only large but is continuous, as demand flows with human activity.</p><p>For investors, ABF provides diversification benefits and an uplift in yields relative to other fixed income instruments (private and public). The assets tend to have their own idiosyncratic risk (e.g., commodities flow financing where each commodity has its own supply-demand dynamics). Asset based lenders generally have less competition than banks or private lenders because ABF requires specialized knowledge. Less competition means stronger covenants, higher yields, better LTVs and bespoke structures that mitigate the downside.</p><p>Collateral drives returns. Loans are typically secured by a discrete set of self-liquidating assets (tax liens or commodity finance). Returns and principal payments are baked in, and refinancing risk is nonexistent. The quick turnaround allows investors to manage portfolios and deploy the cash into new opportunities rather than remain illiquid in longer-dated funds. The collateral itself has substantial liquidation value independent of the borrower and overall financial markets and, at times, is sellable in global highly liquid markets creating recovery floors and effective enforcement. Asset-based lending may also provide an inflation hedge as loans are floating or are repriced with each short-term financing cycle while some collateral values increase in price with inflation improving overall LTV.</p><p>Not all assets are created equal. Market size matters. Large markets like trade finance ($9.7 trillion) provide significant opportunities. Smaller niches may not. Origination is key. The ability to source proprietary flow allows lenders to capitalize on the asset class. Collateral management is critical. Monitoring and monetizing the assets mitigates risks and maximizes returns. Lender know-how and capabilities are thus important.</p><p>Investors have already experienced the benefits of private credit. ABF, as a subset of private credit, provides additional diversification benefits, downside protection and potentially higher returns. As investors review their portfolio and finalize their allocations to traditional private credit, ABF might be worth a look.</p>