Stock down 93%, Affirm’s BNPL model suffers from rising funding costs


Letting too many people borrow money to buy things they can’t otherwise afford creates an economic sugar spike followed by a crash.

This happened in the years leading up to the 2008 financial crisis. Lenders made it easier for people who did not have enough income to buy homes. Investment banks packaged these mortgages into securities and sold them to highly indebted financial institutions.

Confidence in subprime mortgage-backed securities has eroded, as has Wall Street’s willingness to continue funding financial institutions that have stepped up to buy the securities.

This led to the collapse of Bear Stearns and Lehman Brothers and a financial crisis that cost $23.7 trillion in government bailouts and reparations guarantees.

Could the Buy-Now-Pay-Later (BNPL) loan market follow a similar trajectory?

After all, Affirm Holdings – whose shares are trading 93% below their November 2021 high – is doing something similar. It provides unsecured installment loans at low interest rates to help millennials and Gen Z shoppers buy clothes and electronics — and “carefully repackages them for investors,” according to Bloomberg.

I don’t see the securitization of BNPL collapsing the global financial system, but I wouldn’t buy Affirm shares. With credit problems mounting, valuations falling and competition from Apple, Affirm’s shareholders’ best hope may be to be acquired by an incumbent like Capital One.

BNPL securitizations are smaller than subprime MBS

Although BNPL holders face many problems, the sector is much smaller – representing about 2.7% of e-commerce in 2021 or $97 billion, according to TUSEN, of ​​which only 30% Affirm securitizes, according to Bloomberg.

That’s far less than the $685 billion in the subprime mortgage-backed securities market, according to the IMF, in 2007, so I suspect BNPL’s capital withdrawal won’t cause another financial crisis.

Nonetheless, Affirm’s BNPL-backed securities are losing value and becoming more expensive to issue as rising interest rates and near-record inflation “cast a shadow over the sector”, according to Bloomberg.

This spring, Affirm’s borrowing costs through securitizations have more than quadrupled. For example, in February 2021, Affirm paid a coupon of 0.88% for notes maturing in four years. In May, Affirm’s coupon was 4.3% for securities maturing in May 2027, Bloomberg noted.

Although securitizations are not a significant source of funding for BNPL’s lenders, Fitch Ratings is concerned about higher credit risks. Harry Kohl, a Fitch Ratings who covers the asset-backed securities industry, told Bloomberg: “When you source borrowers with weak or thin credit – the younger demographic, basically – it’s is always a warning to us and something that could be an indicator of potential negative credit performance.

BNPL valuations fall

Affirm is not alone in suffering from BNPL’s setbacks – rivals Afterpay and Klarna are also being tested due to missed payments and rising interest rates. According to the Wall Street Journal, here is how much BNPL delinquencies have increased:

  • To affirm. Outstanding loans at least 30 days past due rose from 1.4% in March 2021 to 3.7% in March 2022
  • After-payment. Losses represented 1.17% of total dollar payments processed in its most recent quarter, compared to 0.9% in its last full fiscal year ending June 2021.
  • Zipper. “Bad debts and expected credit losses” jumped 403% in the last six months of 2021 compared to the same period of the previous year

The broad deterioration in BNPL industry credit quality is weighing heavily on private market valuations. As the Journal reported, Klarna is in talks to raise more funds at a significant discount from its previous valuation.

Specifically, the Journal noted that Softbank-backed Klarna is in talks to raise $500 million at a $15 billion valuation, a 67% reduction from its peak valuation of $46 billion in 2021.

Certainly, Klarna’s losses have skyrocketed. It reported a five-fold increase in its net loss to around $250 million in the first quarter of 2022 and said in May that it would lay off 10% of its workforce “due to what it called a volatile economic environment and the need to reduce costs”. notes the Journal.

Affirm’s First Quarter Earnings and Guidance

Affirm reported its third quarter 2022 results on May 12 and its stock jumped 30%, after the company announced strong third quarter results and raised its guidance.

According to Invezz, Affirm lost 19 cents per share in the third quarter – including 27 cents per share less bad than the FactSet consensus while revenue rose 54% to $354.8 million – about $10 million more than intended.

For fiscal 2022, Affirm forecast revenue of between $1.33 billion and $1.34 billion, the low end of which matched expert forecasts, according to Invezz.

Affirm stock fell from a closing price of $18.04 on May 12 to $25.71 on May 19.

Apple’s BNPL Competition

Since then, Affirm stock has fallen 24%. One possible reason is news that in early June, Apple announced plans to enter the BNPL industry by allowing Apple Pay users to split purchases into interest-free installments.

This is not good news for rivals like Affirm. MoffettNathanson associate Lisa Ellis told Yahoo! Finance that the announcement was not a surprise but does indicate a “commoditization in this space” which would understandably put pressure on standalone players like Affirm and Klarna. She argued that Apple or another incumbent might find these companies attractive acquisition targets to add this “funding functionality.”

Affirm’s Bullish and Bearish Cases

One analyst is unabashedly bullish on Affirm due to its “remarkable growth trajectory,” according to DA Davidson’s Chris Brendler. As MarketWatch reported, Brendler thinks macroeconomic pressure can “reduce [BNPL] competition” and that investors do not give Affirm enough credit for its “underwriting and financing advantages”.

Additionally, Brendler sees that Apple is competing in a different segment and further regulatory scrutiny of BNPL will prevent new rivals from entering the space.

Not all analysts are so optimistic. Wedbush analyst David Chiaverini kicked off the coverage with an underperforming rating due to growing competition, a long and winding road to profitability and slowing online sales.

Count me among the Affirm bears. In January 2021, I saw big risks in owning Affirm stock after a boffo IPO – including high valuation, heightened competition, and the possibility of slowing post-pandemic growth.

With 14.14% of its float sold short as of May 31st, I think the bears are on the good side of Affirm.



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