As the ranks of Australia’s loss-making buy now pay later sector thin out, the industry’s second largest provider Zip Co Limited is facing a material refinancing challenge in 2024.
According to disclosures in its 2023 accounts, Zip needs to refinance more than half of its secured funding facilities next year.
All up, the company has to refinance A$1.76 billion worth of facilities in 2024, representing 64 per cent of the group’s $2.7 billion worth of funding lines used to support its consumer business.
It also faces having to renew a separate $90 million corporate debt facility by the end of March.
This presents a major challenge to new chief executive Cynthia Scott, who took the reins of the business in August.
Scott, a former head of Barclay’s debt capital markets business in Hong Kong, will need to draw on her deep experience managing debt finance programs as an investment banker if Zip is to renew its funding lifelines at a bearable price.
It’s a daunting challenge because the massive refinancing exercise will have to be undertaken at the peak of an interest rate cycle.
Most of the facilities required to be refinanced next year are priced at floating bank bill swap rates plus a margin.
Swap rates have soared in recent years along with the margins attached to funding programs akin to those Zip is now looking to roll over.
More than $1 billion worth of three year notes issued by Zip in 2021 were priced when bank bill swap rates were holding below 30 basis points.
Today, they have blown out to more than 4.4 per cent.
That has huge implications for Zip’s cost of funding going forward because prospective and existing noteholders will be demanding much fatter margins to refinance the 2021 notes.
In such an environment Zip will be forced to work much harder to eke a return on its instalment finance operations, which presently remain unprofitable.
The extreme funding pressures bearing upon Zip and other BNPL providers are likely to induce further strategic reviews of their business models, which could see them rework their product offers to include more traditional forms of consumer finance.
“They’ve got to get more of their customers revolving to generate any sort of return for shareholders,” said payments expert Brad Kelly.
“Zip has already launched a new service known as Zip Plus, which has most of the traits of a credit card product, including monthly fees and a double digit interest rate on revolving monthly balances.”
Kelly, a long-time critic of Zip and the broader BNPL sector believes that Scott’s early reworking of the company’s business model has given the company a shot at survival.
“They have no choice but to restructure their products and reprice them in line with legacy consumer finance businesses,” he said.
“To her credit, Scott has done that.”
Scott and her management team will probably have little room to move on the pricing of Zip Plus and the buy now pay later product known as “Zip Pay” as the company’s funding costs steepen over the next 12 months.