In a suddenly uncertain economic environment, Mulligan Funding has found some security.
On Feb. 6, the San Diego fintech lender announced the closing of a $100 million asset-backed securitization (ABS). The senior bonds in its first securitization also achieved an A rating from Kroll Bond Rating Agency (KBRA) – the highest rating they will award a first-time issuer in this asset class. The facility has a 3-year revolving period and is expandable to $500 million.
CEO
Mulligan Funding LLC
“This is a really significant step forward for us,” said Mulligan Funding CEO David Leibowitz. “It adds materially to the funding we require in order to continue on the path of responsible growth to which we remain committed. We’re particularly pleased that the ratings afforded to these notes by KBRA, constitute an affirmation of the disciplined approach to credit management which has always been at the core of our business strategy.”
Leibowitz also pointed out that Mulligan was “lucky” to successfully get the deal done “at this particular time.”
“In this sort of interest rate environment investors are risk averse,” he said. “They’re looking to back companies that have issued bonds before that they’ve invested with before that have a track record in public markets. It’s very difficult to get new deals done in an environment as erratic and volatile as the current one.”
Experience With Down Markets
The successful $100 million securitization is in line with Mulligan’s experience navigating down markets. The company was founded in 2008 when big banks were even more risk averse and largely withdrew from lending to small and medium businesses (SMBs).
Mulligan was one of the many fintech lenders that took the opportunity to utilize technology to more efficiently service loans to that segment of businesses than banks that must manage “massive infrastructure” and “big branches,” Leibowitz said. “So if someone comes into a bank for a couple hundred thousand business loan, it’s incredibly hard for the bank to service that need.”
Since 2008, the family-owned Mulligan has grown into one of the leading providers of working capital to SMBs across a wide variety of industries.
“Business which are a little too small to get the banks’ attention at the level of service they really should be getting from banks,” Leibowitz said.
Loan sizes from Mulligan are typically in the $5,000 to $2 million range. To date, the firm has so far provided access to over $1 billion in working capital to its customers.
Financial Instrument
An ABS is a financial instrument where a pools of assets that debt investors lend money to are segregated within a Special Purpose Vehicle (SPV) and the return investors get back is directly linked to the performance of the pool of assets
Mulligan a took $100 million of loan principal, made up of lots of individual loans to small businesses, put that portfolio in an SPV and then issued $100 million worth of bonds to investors.
“The contract we securitized is a portion of our book of receivables from these small businesses,” Leibowitz explained. “The return on those bonds is dependent on flows of payments from the borrowers to the SVP in respect to the loans.”
Bonds in an ABS SPV are segregated into “tranches” based on risk, typically lettered A, B, C, D. The A’s get paid first and so on but also get the lowest interest rate. The D investors make the most money because they take on the highest risk.
‘More Efficient Mechanism’
Prior to the ABS, Mulligan accessed the capital it lent to SMBs from a combination of senior bank lines of credit from two different banks and individual “mezzanine investors,” Leibowitz said. Like the ABS investors in riskier tranches, the mezzanine investors are reimbursed after the banks and therefore Mulligan paid a “much higher interest” to them.
“Until the securitization, that was the mechanism of funding our own loan advances,” Leibowitz said, adding that the reason Mulligan looked to securitization is because the firm “could figure out how to grow the senior debt piece” of its balance sheet, “but it was very hard to imagine how we could double and triple the size of our mezzanine debt facility.”
To reduce the risk for the “handful of very wealthy individuals” that make up Mulligan’s mezzanine investor pool, the firm used the $100 million to pay down debt, adding capacity for the firm to “regrow its book,” Leibowitz said. “And when we get to capacity again, we’ll do this again.”
Leibowitz added that he is confident in the ABS mechanism’s feeling ability to grow and fund Mulligan’s growth “once markets start returning to normal.” And although he said he is seeing evidence of recession in Mulligan’s loan portfolio at moment, the firm does not act like “cowboys” taking unmanageable risk.
“It feels good to know that when the macroeconomy settles down, we’ll have access to funding needed to grow and service the market,” he said.
Leibowitz is already looking forward to Mulligan’s future securitization deals, because they become “a more and more efficient mechanism as time goes on.”
“The first foray into the securitization market is always the most painful for us and for the people who invest in these bonds because they don’t know us. We don’t have a public market track record, so we have a bunch of first-time issues to deal with and they have a bunch of due diligence and first time investor issues to deal with,” he said. “Next time around both those will be much simpler.”
Mulligan Funding LLC
Founded: 2008
CEO: David Leibowitz
Headquarters: San Diego
Business: Fintech lender providing working capital to small and mid-size business
Employees: 160
Website: www.mulliganfunding.com
Notable: Mulligan Funding has provided more than $1 billion in working capital to SMBs since 2008.
