Affirm Holdings has secured a significant funding deal with Liberty Mutual Investments that expands their existing capital partnership. Here are the key details:
Deal Structure
- LMI will provide $750 million in funding through June 2027
- Liberty Mutual plans to invest up to $5 billion in the program over time
- The deal involves purchasing Affirm's installment loans on a forward flow basis
Lending Target
- Affirm aims to reach a lending target of over $34 billion by 2025, representing approximately 25% year-over-year growth
Financial Position
- As of September 2024, Affirm's total funding capacity was $16.8 billion
- The company generated over $28 billion in gross merchandise volume for the twelve months ending September 2024
Market Response
- Affirm's stock rose following the announcement
- The company's stock has increased by over 40% in the last 12 months
- The deal follows other recent financing arrangements:
- Sixth Street Partners agreed to lend $4 billion
- Prudential Financial's investment arm pledged $500 million
This funding agreement provides Affirm with the necessary capital to continue scaling its operations in the Buy Now, Pay Later (BNPL) market while maintaining its position as the largest BNPL company in the U.S.
Affirm Holdings Credit Performance Metrics
Delinquency Trends
- 30-day delinquency rates have remained stable at approximately 2.4% for monthly loans
- Overall delinquency rates are holding steady around 2.5%, which is notably lower than credit card delinquency rates that have surged to 3.25%
Loss Management
- Pay in 4 loans (short-term) show loss rates of less than 1% of GMV
- The company increased provisions for credit losses by 60% to manage risk while scaling
Underwriting Approach
Proprietary Risk Assessment
- Uses 500+ data points for risk management
- Leverages 70M+ historical loans to power and improve models
- Employs 80 specific inputs for fraud detection
Alternative Data Integration
- Evaluates multiple data sources beyond traditional credit metrics:
- Transaction history
- Merchant details
- Previous Affirm repayment history
- Credit utilization patterns
Risk Management Strategy
Structural Advantages
- Short weighted-average loan life of 5 months provides flexibility
- Constant monitoring of credit performance at merchant and transaction levels
- Ability to quickly refine models based on performance data
Growth Management
- Maintains 3-4% Revenue Less Transaction Costs (RLTC) as percentage of GMV
- Currently at 3.8% RLTC/GMV ratio
- Focused on high-quality transactions with concentrated volume in top credit tiers
Market Context
The company's credit performance is particularly noteworthy given that credit card delinquencies are expected to rise to 2.76% (90+ days past due) in 2025, while Affirm has maintained stable metrics despite aggressive growth.
Our Opinion
This is what institutional-grade alternative lending looks like. They're maintaining credit discipline while scaling, which is the holy grail. The 3.8% RLTC/GMV ratio shows they're not buying growth at the expense of profitability.
The growth target of $34B by 2025 is ambitious but not unrealistic given their trajectory.
What's interesting is that they are changing to a funding model that relies on institutions. They are basically becoming a source of loans for big investors looking for returns. It's a clever idea, but how well they carry it out is crucial in this industry.
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