What is Asset-Light Debt
Asset-light debt is a form of corporate debt where the amount of collateral is below typical standards. The company may not have the assets to post as collateral for a loan and may seek out cash flow financing, using their cash flow to qualify for a loan. This leaves the loan secured with little or no assets.
BREAKING DOWN Asset-Light Debt
Asset-light debt involves loans that have little to no collateral. The dollar value of assets used as collateral is less than normal, meaning the assets used to secure the debt are “light.” Instead of using assets as collateral, a borrower will use their credit quality or steady earnings to show their ability to pay.
Who Uses Asset-Light Debt
Companies may have a largely asset-light debt structure, or seek an asset-light loan, for a number of reasons. Those with asset-light debt generally rely on their cash flows to qualify for loans. Asset-light debt also requires the borrower to have a better credit quality than asset-backed loans and steady earnings.
These companies are also able to carry less overall debt given the lack of collateral. Unsecured loans, such as revolvers and credit lines, are types of asset-light debt.
Companies utilizing asset-light debt can be holding companies. These companies own virtually no assets, or one specific asset, and are formed for the specific purpose of servicing a loan. In typical asset-light cases, it’s to hold a debt of a parent company. In that case, it may have zero assets and a loan.
Asset-Light Debt Example
Banks and lenders generally require a company to put an asset up as collateral for the loan. This secures the loan, meaning, in the event of default the bank can take the asset to cover a portion of the loan loss.
For example, a bank generally offers a loan that’s 70% of the value of the collateral. Company ABC uses a $100,000 piece of equipment to secure a $70,000 loan. If the bank has to repossess the equipment there is enough value to cover the loan balance even if they have to resale it at a discount.
In the case of asset-light debt, the bank may accept a smaller amount of collateral and take into consideration the company’s free cash flow. For example, Holding Company ABC has a $200,000 loan but $10,000 in assets. The parent company’s promised cash flows, or dividends, to the holding company are instead used to secure the loan. The use of this asset-light debt structure helps insulate the parent company, should the loan become unserviceable. Special purpose vehicles (SPVs) can be asset-light, acting as a way to finance assets with little collateral or equity.