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Online shoppers highly value the convenience of using PayPal for purchases. Simplicity is also a priority for PayPal.
This fintech group recently announced a partnership with private capital group KKR to sell loans worth up to €40bn. While PayPal has a strong brand and millions of customer relationships, its management and shareholders prefer to focus on asset-light transaction fee income rather than taking on credit risk on its balance sheet.
The method of selling loans is not groundbreaking. However, KKR, as an integrated entity, can handle this internally instead of relying on an investment bank to securitize a loan package. KKR, known for its leveraged buyout expertise, has expanded its portfolio to include a $200bn credit investment business and a life insurance affiliate called Global Atlantic, both hungry for yield.
KKR’s interest lies in investing in “asset-based” finance. These fixed-income products are different from typical corporate debt and include mortgages, car loans, consumer lending, and home improvement loans.
As regional banks in the US become more reluctant to lend, private capital lenders can step in to fill the void. They have the flexibility to focus on specific areas of the banking value chain where they excel.
For example, KKR has committed €40bn to purchase buy now, pay later loans, which are typically short-term and unsecured. However, the total value of the KKR lending facility is €3bn, indicating the outstanding amount of these loans at any given time.
By selling the loan portfolio, PayPal expects to generate immediate proceeds of $1.8bn, which it plans to reinvest in its existing share repurchase program. This capital injection is much needed as the company’s shares, which experienced significant growth during the ecommerce and tech boom of the pandemic, have declined by almost 80% from their peak in 2021.
While this financial engineering may not fully reverse PayPal’s declining fortunes, it does provide some breathing room for the management to address the challenges at hand.
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