This panel is designed to focus on structural considerations when raising debt. A critical topic to explore is the different types of debt capital-raising structures currently seen in the market. Alex, perhaps you can begin by providing an overview of the key structures we are seeing today.
By way of background, I co-founded Upper 90 and served as the CIO for several years, where we focused heavily on fintech warehouse financing. In this context, we typically saw an 80% advance rate against underlying assets, sometimes stretching to 90% or 95%. These were generally senior and secured deals. Over the past few years, I’ve spent time observing the lending environment, and an important moment for the market was the collapse of Silicon Valley Bank (SVB) early last year. Instead of pulling back as many expected, lenders became more active, looking for ways to invest their money.
Fast forward to today, lenders are still offering relatively high advance rates against collateral, though they may have tightened certain eligibility criteria or concentration risks. While opportunities for alternative debt structures are abundant in developed markets, these structures are less prevalent in emerging and frontier markets.
Key options include traditional senior advances, forward flow structures, and securitizations—whether private or public—depending on scale. Although forward flow deals have become less common, they may make a resurgence as market conditions evolve.
Eduardo, what recent trends have you observed at CXC regarding debt structures, particularly in Mexico?
Backup servicing involves replicating the actions of the primary servicer. The backup servicer maintains a mirror of the portfolio yielded to the SPV and is prepared to take over servicing if the originating company defaults. This ensures continuity in collecting payments and managing the portfolio, which is essential for lender security.
In developed markets like the U.S., primary servicers are often third-party firms that specialize in loan servicing. However, in emerging markets such as Mexico, lenders prefer to maintain the servicing role themselves due to the relationships they’ve built with end users.
Demetris, could you elaborate on forward flow structures and other recent trends in the market?
Demetris (Middlemarch Partners)
Forward flow involves platforms originating assets and either holding them on their balance sheets to capture interest margins or selling them to obtain origination fees. For emerging platforms that may lack the scale for full balance sheet facilities, selling assets provides a way to finance their businesses by receiving upfront fees.
In recent years, we’ve seen asset buyers shift from paying the entire origination fee upfront to holding back a portion, ensuring performance expectations are met before full payment is made. This approach minimizes downside risk, particularly for loans where performance may be uncertain.
In today’s market, credit enhancement is increasingly critical, particularly as delinquencies have risen in certain segments. One method of enhancing credit is requiring more "haircut capital," which usually comes in the form of equity. Whereas 95% advance rates were once common, lenders now typically offer lower rates, perhaps 80% or 85%. To fill this capital gap, Mezzanine (Mezz) tranches or equity slices are often added to the capital stack.
We’re also seeing innovative use of insurance as a form of credit enhancement, particularly in Latin America. In some structures, loans are originated, sold into a trust, and notes are issued from the trust, with each asset insured. In the event of a default, the noteholders can collect on the insurance of the specific asset, providing greater security to investors.
Insurance wrappers and financial performance guarantees were more common pre-2008. Are we seeing a resurgence in this approach?
Demetris (Middlemarch Partners)
Yes, there is renewed interest in wrapping senior tranches of securitizations with insurance. However, scale is important; these products are typically only available for portfolios of $50 million or more. The benefits include easier ratings, as the rating reflects the credit counterparty risk of the insurer rather than the underlying assets. Additionally, rated and insured assets are more attractive to investors and can allow for greater leverage, providing alternative financing options for emerging fintech lenders.
Mike (Cascade Debt)
When structuring debt, fintech lenders typically progress through four main structures. Early on, companies rely on on-balance-sheet loans, such as venture debt, which is often provided by local family offices or banks. As they grow, they may transition to asset-backed facilities, which offer greater leverage but at higher costs. The final stages involve forward flow agreements or securitizations, which allow companies to package and sell loans more efficiently.
In today’s volatile market, mature companies are increasingly opting for a mix of debt structures to balance their risks. Asset-backed deals, while more expensive, come with longer-term commitments, offering stability. Conversely, forward flow agreements can be terminated abruptly, leaving companies vulnerable to funding gaps.
Mike, given your experience as an FX trader at HSBC, I think you’re in the best position to kick off a discussion on how FX hedging and structuring play such a vital role in emerging markets, especially when dealing with tech debt structures.
Mike (Cascade Debt)
FX is a critical concern for anyone operating in emerging markets. When raising funds externally, it’s most likely to be in US dollars, which brings up the challenge of foreign exchange risk. The ideal situation is to secure local currency funding—whether through family offices, local development banks, microfinance institutions, or DFIs—since local loans tend to be cheaper and help avoid the complexities of FX hedging altogether. However, if dollar funding is necessary, managing the risk of currency mismatches becomes essential. Your assets are typically in one currency, while funding is in dollars, which can be disastrous without proper hedging. Simple strategies, such as using forwards or options, are often the best way to mitigate risk. The key is not to overcomplicate things; just ensure you have a plan that protects you from potential blow-ups.
That’s a great point, Mike. It’s interesting how,
Generally speaking, equity investors tend to overlook FX risk compared to debt investors.
As equity represents permanent capital, they are less focused on hedging the FX exposure. However, debt investors, on the other hand, expect to be repaid in full, along with periodic interest payments. These payments are often not in the same currency as the underlying loans, making FX hedging vital to avoid significant losses. Particularly for early-stage platforms, where loan books are financed predominantly with equity, introducing FX hedging later on can bloat unit economics, making it an area that requires careful planning.
