Is credit card/BNPL debt actively traded?
I know for instance that Klarna securitizes the BNPL debt it originates and sells it to avoid keeping all of it on its balance sheet. However I'm wondering: who are the investors buying? It's private credit but it's consumer rather than corporate so I assume the institutions who buy that debt must use some quant strategies to evaluate risk and price it?
Same question for credit card debt.
When they securitize it and sell the notes into the ABS market the top of the securitization has a lot of insurance buyers while the bottom will have specific structured credit buyers (credit hedge funds, private credit special situations sleeves, etc). Probably not the vanilla type of mandate that you’d hear of but trust me there is breadth of demand for this type of niche product.
How do you even due diligence this kind of debt? Like I get at the structured credit hedge funds, they're probably employing some quants for this, but what about the PE SS groups? Do they base their thesis mostly around their macroeconomic predictions about consumer defaults and all? Or are they pretty much shooting shots in the dark and hope that consumers in aggregate pay up?
According to this Brigade did $500M so I assume other credit HFs are doing similar bets (or at least those HFs with structured credit expertise)
https://www.wsj.com/articles/shopping-planes-and-khloe-kardashian-how-p…
Currently at a Special Sits HF with a sleeve of capital dedicated to this stuff. Although there are multiple ways to structure the deal/facility, in general funds primarily invest via two ways: Forward Flows (general consumer debt) and Warehouse Facility (BNPL, etc). In simple terms, basically we get an insight into pay history, FICO, and etc of the borrower or we partner with originators and provide them our criteria (income, FICO, etc) of loans we would take off their books..
imagine if BNPL debt is the MBS of 2022. Though hopefully institutional investors a bit more cautious. Especially since most of the BNPL customers are millennials and gen z.
Edit: A recently published article: https://www.latimes.com/business/story/2022-06-07/affirm-app-loan-value
wonder how they will be able to do during a rising rates environment even if company says they won't be affected that much.
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