Affirm's $4bn Deal with Sixth Street

Affirm has secured a groundbreaking $4 billion funding deal with Sixth Street, marking the largest capital commitment in the company's history. This three-year forward-flow agreement will enable Affirm to:

• Extend up to $20 billion in loans over the next three years

• Provide flexible, scalable financing solutions

• Strengthen its position in the buy-now-pay-later (BNPL) market

Financial Implications

Funding Mechanism

• Sixth Street will invest through an asset-based finance platform

• The agreement involves a forward-flow agreement where Sixth Street will purchase loans before they are originated

• Capital will be reinvested as consumers make repayments

Market Context
Affirm's current financial standing includes:

• Total funding capacity of $16.8 billion (as of September 30)

• Over $28 billion in gross merchandise volume in the past 12 months

• Claim of controlling one-third of the U.S. pay-later market volume

Market Trends

BNPL Sector Outlook

• The asset-based finance market is projected to grow from $5.2 trillion to $7.7 trillion by 2027

• Potential interest rate cuts could benefit BNPL providers

• Affirm expects gross merchandise volume to increase to $33.5 billion in 2025

Competitive Landscape

The deal positions Affirm strongly against competitors like Klarna and Afterpay, with the company leveraging its unique data-driven underwriting approach and partnerships with major retailers like Amazon and Apple.

Potential Challenges

Risk Considerations

• Delinquency rates have slightly increased to 2.4% of monthly U.S. installment loans

• Potential economic downturns could impact loan repayments

• Ongoing need to maintain robust credit assessment mechanisms

Affirm's Loan Performance Metrics

• Affirm provides credit to consumers at APRs between 0% and 36%. The specific APR depends on factors like the purchased item, the merchant, and the consumer's perceived likelihood of repaying the loan.

• If a consumer is late or misses a payment, they don't owe any additional amount. This means there's no extra yield for investors if a loan isn't repaid on time.

• Affirm's delinquency rate for payments over 30 days was 2.8% of active balances as of September.

• Affirm's CEO Max Levchin stated that the company's credit quality is resilient, although customer delinquency rates are slightly higher than a year ago.

The Mechanics of the forward-flow agreement between Affirm and Sixth Street

A forward-flow agreement is a contractual arrangement where a buyer commits to purchasing loans from an originator before those loans are actually made. This provides the originator, in this case Affirm, with certainty of funding and allows them to scale their lending operations more predictably.

Purpose: The agreement provides Affirm with "off-balance sheet funding.” This means the loans Affirm originates are sold to Sixth Street and therefore don't stay on Affirm's balance sheet. This approach can help Affirm manage its capital more efficiently and potentially reduce its regulatory capital requirements.

Structure: Sixth Street will purchase the loans through a "specialized asset company structure." This suggests the creation of a separate legal entity specifically for holding and managing the loans acquired from Affirm. This structure could be designed to isolate risks, optimize tax efficiency, or comply with regulatory requirements for loan ownership and transfer.

Scale: Sixth Street's commitment of up to $4 billion will enable Affirm to originate over $20 billion in loans over the next three years.This indicates the agreement allows for significant scaling of Affirm's lending activities, with Sixth Street providing the necessary funding for this expansion.

Loan Type: Sixth Street is specifically buying consumer installment loans. These are loans individuals take out to finance purchases, typically repaid over a fixed period with regular installments.

Affirm Partnerships

Retail Partnerships

Affirm partners with major retailers to integrate its "Buy Now Pay Later" (BNPL) payment solutions into their checkout processes. These partnerships are crucial for driving transaction volume and expanding Affirm's market reach. Some key examples mentioned are:

Walmart: One of the world's largest retailers, offering Affirm as a payment option exposes their vast customer base to Affirm's services.

Shopify: A leading e-commerce platform, integrating Affirm into Shopify's system allows numerous online merchants using Shopify to seamlessly offer Affirm's BNPL option to their customers.

Amazon: While the specifics of this partnership aren't detailed, Amazon's massive scale and customer base make this a significant driver of potential GMV for Affirm.

Funding Partnerships

Affirm partners with various financial institutions and investment firms to secure funding for its lending operations. These partnerships are essential for Affirm to maintain sufficient capital to support its loan portfolio and growth objectives. Here are some notable examples from the sources:

Sixth Street: This $80 billion investment firm committed up to $4 billion to purchase Affirm loans over the next three years through a forward-flow agreement. This is Affirm's largest capital commitment to date.

Canada Pension Plan Investment Board: This institutional investor has committed up to $1.4 billion to Affirm.

PGIM Fixed Income (Prudential Financial): This investment management firm recently purchased $500 million of loans from Affirm.

Our Opinion

This $4 billion deal with Sixth Street is smart: Sixth Street can buy loans before they're even made, which helps Affirm keep their finances in order while growing.

The interest rates range from 0-36%, which means they're targeting different types of customers. Lenders would appreciate their honesty about their 2.8% delinquency rate for loans overdue by 30 days or more. However, it might concerned them that they don't charge extra fees for late payments. While it's a nice gesture, it limits their earnings even though they have to spend more on managing late accounts.

On the bright side, their partnerships with big names like Amazon, Walmart, and Shopify are impressive. Plus, getting funding from major investors like CPPIB and PGIM shows that big players believe in their approach.

Tech Video Tutorial: Automate Smarter Lending Decisions - Analyze Your Historical Data

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