Key Takeaways
- Credit diligence does not end at deployment. A position is underwritten once but managed for years, and most of what determines the outcome happens after the facility is in place.
- Performing positions warrant the same scrutiny as troubled ones — they are simply the easier to leave alone.
- The May review of the Alt Lending facility tested four things directly: whether the book is behaving as underwritten, whether reported growth survives the underlying data, how the federal policy shift cuts both ways, and whether underwriting and servicing standards have held as volumes rise.
- A clean record of declining business is a stronger signal of discipline than a clean record of writing it.
- On that evidence we extended a further $15m facility — the manner of reaching the decision mattering more than the decision itself.
The work that comes after the decision to lend
Credit tends to be examined most closely at the point of entry and rather less so thereafter. The diligence is concentrated before the capital is committed, the decision is taken, and the position is largely left to run. We prefer to keep looking. A position is underwritten once and lived with for years, and much of what determines the result happens after the facility is in place rather than before. That is most useful where it is least obviously needed: a position under strain commands attention of its own accord, while one performing well invites the opposite, and is the more easily left alone for it.
A facility we extended to Alt Lending in March 2025 serves as an illustration. The business operates in the US private student loan market, buying distressed obligations below par and working them back towards recovery; the facility is structured as a credit linked note against its origination model. In May we spent two days at its offices in Scottsdale with the leadership — Mark Brenner, Mary-Jo Terry and Brian Osher — and a separate session with the servicer. With the portfolio considerably larger, the federal lending regime altered, and a request for further capital before us, it was a full operational review rather than a courtesy call.
The first question is the plainest: is the business doing what it was underwritten to do. It was. As at the March tape the book stood at 1,941 loans and roughly $10.1m of outstanding principal, with the bulk acquired at around four cents on the dollar against an exit measured against seventy cents of principal par — a margin wide enough to absorb a good deal of underperformance before the structure feels it. It is granular by design: an average balance of about $5,200 and a largest single loan under $31,000, so concentration risk is contained by construction. None of which is remarkable, which is rather the object.
The second question is whether the reported growth is real, growth being the figure most easily flattered. Inbound enquiries were up some twentyfold since the start of the year and conversions up more than 250 per cent. We did not take the figures as given; we set them against the underlying data, and they stood. What the data showed is that the limit on the business is not its ability to find assets but the capital to fund them — the acquirable pipeline runs to around a billion dollars against a deployed figure that is a small fraction of it. That is the proper context for a request for more capital, rather than the reflexive scepticism such requests tend to meet.
The policy backdrop deserved understanding rather than applause. Recent federal legislation has withdrawn support from a large number of borrowers, and the effect on demand for private alternatives has been immediate. Less remarked upon is that the same change removes the mechanism that used to absorb borrower stress across the sector, so arrears and defaults will rise. For a business that buys distressed obligations that is opportunity rather than threat, but it puts more weight on the underwriting and the servicer, and we looked at both directly.
The underwriting held up. We took eight files — six funded, two declined — across a spread of states, sources and credit profiles. The funded accounts ran from 622 to 718 on credit score and 28 to 38 per cent on debt-to-income, inside policy in every case, with sub-prime files correctly escalated and signed off. The two declines are the more telling: each was turned away for sound, documented reasons — a breach of the debt-to-income ceiling in one, three concurrent failings in the other — with no exception made to keep volume up. A business accelerating into a large pipeline is under steady pressure to loosen its standards, and a clean record of saying no is the surest sign it has not. The servicer review raised nothing of concern, and servicer performance stays on the list of things we watch, being the sort that declines slowly and then quickly.
On that evidence we were content to extend a further facility of $15m, on which we will set out more in due course. The decision is less the point than the manner of reaching it: a position examined closely after the money had gone out, rather than judged from a distance on figures supplied for the purpose. There is nothing exceptional in any of this. Diligence before lending is simply expected; the part that decides how a credit position turns out is the attention paid to it afterwards, while the capital is at work.
