Finance

Cracks Are Starting To Appear In The “Pay Later” Securitized Credit Market

Cracks Are Starting To Appear In The “Pay Later” Securitized Credit Market

Demand for risky loans being taken on by pay-later company Affirm is starting to wane as investors take further caution during the ongoing rate hike environment.

Securitized loans offered by Affirm Holdings are falling in price while becoming more expensive to issue, Bloomberg wrote this week. It’s a sign that nerves are abound in credit markets. 

The lender has 12.7 million customers and has extended $3.9 billion in loans in the first quarter of 2022. Shares of the lender have plunged about 80% this year amidst a backdrop of rising rates.

The company “funds about a third of its business through securitizations,” Bloomberg noted this week. 

Analyst Harry Kohl, with Fitch, commented that the agency was “monitoring closely” Affirm’s securitizations. He also pointed out they are watching the company’s weakening in credit quality.

Bloomberg highlighted the shift in the credit market: 

Affirm pushed back its latest securitization sale in March, before selling notes maturing in May 2027 at a coupon of 4.3% on the main tranche. It paid 0.88% on the same tranche of a similar deal issued in February 2021 which matures in August 2025. Although the yield at the time of pricing was 0.89%, the February bonds are now yielding 4.01%, according to a Bloomberg model that assumes borrowers won’t prepay their debt, meaning they will pay the debt when the installment loan payment is due. The A tranche of the February 2021 note hit its lowest dollar price value in mid-May, at 98.1 cents, down from a peak in July 2021, when it was above par, at 100.1. 

“When you are originating to borrowers with low or thin credit — the younger demographic, essentially — that’s always a warning for us and something that could be an indicator of potential negative credit performance,” Kohl added.

A company spokesperson told Bloomberg it is “effectively delivering a 4.7% profit margin” per transaction. This is exceeding the company’s long term target of 3% to 4%, they said.

Despite this, the company lost $520.1 million in the nine months ended March 31. 

The company commented: “We are well positioned to drive growth while maintaining attractive unit economics, despite volatile market conditions and a rising interest rate environment.”

Yeah – and “subprime is contained”…

Tyler Durden
Wed, 06/08/2022 – 12:05

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