The AI middleman expanding in the consumer-bond bonanza
Pagaya is helping lenders like Klarna expand by financing riskier loans.
Pagaya Technologies, the AI-powered consumer-lending firm, is issuing its first bond backed by loans made to online shoppers, part of a surge in financial engineering by Wall Street that is accelerating the flow of credit to U.S. consumers.
The details
The firm, founded in 2016 by Israeli entrepreneurs, acts as a financial middleman between the bond market and consumer lenders such as U.S. Bank and the Swedish financial-technology firm Klarna.
Pagaya is set to issue $300 million of bonds Thursday that will be used to fund buy now, pay later, or point-of-sale, loans offered by Klarna. JPMorgan Chase and Atlas, the asset-backed finance arm of Apollo Global Management, are arranging the bond sale, a person familiar with the matter said.
Over the past 12 months, Pagaya has issued about $5 billion of bonds, according to the data provider Finsight. The bonds were backed by bundles of unsecured personal and auto loans that Pagaya has previously focused on.
The context
Pagaya is moving into buy now, pay later loans because that is one of the fastest-growing segments of consumer lending, accounting for an estimated 8% of holiday-season purchases last year. That puts the company in head-to-head competition with Affirm, the dominant fintech company in buy now, pay later lending.
Affirm focuses on lending to consumers with high credit scores. In contrast, Pagaya has grown quickly by financing “second look" loans to borrowers with modestly lower credit scores that partners such as Klarna would otherwise reject. Pagaya says it uses artificial intelligence to analyze large data sets of loans and borrower behavior in underwriting the loans.
While Pagaya is making the loans and bundling them into its bonds, its lending partners get the appearance of approving more borrowers, said Pagaya President Sanjiv Das. “The merchant is happy because they get more approvals and that is very significant for Klarna," he said.
The takeaway
The extra firepower is fueling expansion at Klarna, which is trying to place its initial public stock offering. Affirm has made buy now, pay later loans to Walmart’s online shoppers since 2019. Klarna recently said it would start financing for the retailer’s customers. The new business for Pagaya is boosting its stock price.
For now, bond investors are demanding much higher yields to buy bonds issued by Pagaya than by its competitors. A $220 million portion of the bonds will be rated triple-A by Kroll Bond Rating Agency and will yield about 1.75 percentage points more than benchmark Treasury bonds, the person familiar with the matter said. A bond Affirm issued recently yielded 0.95 percentage point over Treasurys, according to Finsight.
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