AJ Davidson (SixPoint Capital)
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.
Alex (Deep Ocean Partners)
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.
AJ Davidson (SixPoint Capital)
Eduardo, what recent trends have you observed at CXC regarding debt structures, particularly in Mexico?
Eduardo (CXC)
Mexico’s debt market has seen significant sophistication over the last five years. Initially, securitizations were typically conducted in the public market in a standardized manner. However, as U.S. investors recognized high yields in secure transactions, we began to learn from their practices. At CXC, we’ve adapted to whatever structures lenders require to ensure transaction certainty.
A recent example is a whole loan acquisition in Mexico, where we sold the loans originated. This transaction required robust invoicing services for the Special Purpose Vehicles (SPVs) involved, which previously had not been available in Mexico. We’ve developed backup servicing capabilities to meet lender requirements, ensuring they have confidence in the security of their investments.
AJ Davidson (SixPoint Capital)
For those unfamiliar, Eduardo, can you explain what a backup servicer is and why it’s crucial in these types of transactions?
Eduardo (CXC)
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.
AJ Davidson (SixPoint Capital)
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.
AJ Davidson (SixPoint Capital)
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.
AJ Davidson (SixPoint Capital)
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.
AJ Davidson (SixPoint Capital)
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.
Mike (Cascade Debt)
Absolutely. I’ve been through major crises, like the financial crash, where currencies like the Indonesian Rupiah depreciated by as much as 50% in just a few months. Such events show why hedging against catastrophic currency movements is crucial. It’s not just about optimizing for stability over a few years— it’s about protecting your business from sudden, uncontrollable events.
AJ Davidson (SixPoint Capital)
We’ve also started to see the emergence of tech-enabled platforms providing automated hedging solutions. These platforms offer micro-hedging at the asset level, which can potentially reduce the complexity of capital calls. Have you encountered any of these solutions, Mike?
Mike (Cascade Debt)
Yes, FX hedging is an old, well-established industry, and while new solutions are emerging, the fundamentals remain the same. Whether you go with tech platforms or traditional advisors, the objective is to maintain a consistent hedging strategy that avoids potential disasters.
Alex (Deep Ocean Partners)
One thing to keep in mind is that when you hedge using forwards, there’s typically an initial margin requirement. Counterparties will often require collateral—usually cash—immediately upon executing the hedge to cover their credit risk. This means that cash, which could otherwise be used for lending or generating interest, is tied up in the margin account. Additionally, there’s the issue of variation margin, which can arise when the currency moves in your favor, but your hedge moves against you, forcing you to post even more collateral. For early-stage fintech lending businesses with limited capital, such requirements can severely strain liquidity.
In my opinion, the responsibility of managing FX hedging should lie with the lender rather than the fintech platform. Lenders, especially those in emerging markets, can secure more favorable rates and absorb the cost more efficiently due to their relationships with incumbent banks.
There are operational challenges, such as managing interest payments in local currencies or handling tranche growth, but I believe the lender is better positioned to handle these complexities.
Demetris (Middlemarch Partners)
I agree. Larger global firms with sophisticated treasury departments should take on more of the FX hedging role. They have the capacity and infrastructure to manage it, which many early-stage companies do not.
AJ Davidson (SixPoint Capital)
Another challenge we often see, especially in Africa and other emerging markets, is the difficulty in delivering hedges. Even if you secure a hedge, capital controls in some countries make it impossible to get dollars out. That adds an additional layer of complexity to FX management.
Eduardo (CXC)
That’s a crucial point.
Many businesses in emerging markets only look at the interest rate and overall cost when securing financing, often neglecting the FX risk and capital control issues.
Corissa (Almavest)
We’ve also seen some innovative FX solutions recently, particularly those involving blockchain. However, while they have impressive branding, their pricing isn’t always better than traditional methods. It’s an exciting space to watch, but it may not be the best solution right now.
AJ Davidson (SixPoint Capital)
How do you see recent regulatory developments affecting the landscape?
Demetris (Middlemarch Partners)
Regulatory reforms have had a significant impact, particularly in countries like Colombia and Chile. These governments have introduced measures to de-risk the investment environment, making it easier for foreign investors to enter the market. For instance, Colombia’s tax authority now registers and stamps invoices in factoring transactions, turning them into tradable assets. Such innovations have made it easier for investors to underwrite these transactions and mitigate the risk of fraud.
AJ Davidson (SixPoint Capital)
Mike, you mentioned earlier the role of government-backed insurance in emerging markets. Could you expand on that, particularly regarding Indonesia?
Mike (Cascade Debt)
In some markets, you’ll find government-backed credit insurance, but the general sentiment is one of skepticism. In places like Indonesia, the private market is often seen as more reliable. Government-backed schemes, while potentially helpful, come with their own set of challenges and may not always work as intended.
Eduardo (CXC)
That’s a great point, and I’d like to add that while regulations exist to protect investors, they’re not always enforced effectively. In markets like Mexico, we’ve had to ensure that pledges and collateral registrations are handled properly, especially during times of distress. If these processes aren’t executed correctly, the collateral could end up being worth nothing, leaving investors empty-handed.
Moderator:
AJ Davidson – Co-Founder and CEO at SixPoint Capital
Panel:
Alex Urdea – Managing partner at Deep Ocean Partners
Michael Shum – CEO at Cascade Debt
Eduardo Etchegaray – Co-CEO at CXC
Demetris Papademetriou – Partner at Middlemarch Partners
Corissa Steiner – Director Private Credit at ALMAVEST
