Chesswood Group Ltd T.CHW

castlelake deal answers leverage question

[Nashville35]

at just the time when I wonder how chw can continue to grow its loan book and leverage without issuing more equity, this management team delivers another landmark deal.  entering into forward flow agreement with large us alternative investment manager castlelake for up to US$400 million. meaning that castlelake agrees to purchase loan and lease receivables from chw us subs pawnee and tandem. 

this is a big deal, considering that chw US business ended 2021 with gross receivables and leases of US$957 million, so US$400 million isn’t small. 

a forward flow agreement sees the originator (chesswood) sell loans to the Investor (castlelake).  the agreement would involve loans of certain characteristics, involving credit risk, industry group, geographical exposure, etc.  these agreements shift the credit risk from the originator (chesswood) to the investor (castlelake), albeit with certain caveats.   a plain vanilla deal would see a tranche of receivables sold at a negotiated price (may or may not be at par), but the originator (chesswood) would receive an origination fee, servicing fee and may generate a return if the rate of return exceeds a certain hurdle.  in essence, chw is leveraging its infrastructure with a deal like castlelake.  once again, smart, as it provides castlelake exposure to an asset class it wouldn't be able to source organically.  the loans would then be non-recourse to chw, hence why they are “off-balance sheet” funding.    

so these receivables would not be included in leverage calculations, provided there is no ultimate recourse back to chw, as they have moved off chw balance sheet.  this means that chw can continue to expand and grow its origination pipeline and receivables portfolio in the US market without a big dilutive equity deal.  with more volume, chw cud arguably negotiate down broker commissions, commit to larger franchising deals with Tandem, broaden geographic scope, etc. 

these deals are all about structure, and the press release doesn’t provide much, but guarantee these are complex deals.  nonetheless, another interesting chapter of chw begins.

the most appealing part of chw story as an equity holder is the new team’s approach to issuing equity.  many run of the mill finance companies wud be convinced to issue new equity to satiate banking consortium’s desire to reduce leverage in order to keep growing.  chw seems very careful to not dilute equity and find alternative ways to fund the lending book.  as an equity holder, v appealing.

chw is becoming a considerable size (+$2 billion lending book), which will provide benefits related to scale, industry prowess, banking negotiations, public market ramifications, etc.   

+$20 by end of 2022 imo. 

[felix10]

Nashville, thanks for the explanation of how this new deal is expected to work. For those who didn't see it, here's the original news release: Castlelake and Chesswood Announce Forward Flow Purchase Agreement for Equipment Loan and Lease Receivables 2022-03-16 05:30:00 PM ET (CNW Group)

[apainter]

Thank you for your analysis post, Nashville, really appreciated.