What’s the easiest way to make a participant in the securitization market angry? Based on experience, it might be to ask them about financing a takeaway.
The possibility of securitizing such loans has led some to dub the deals as ‘burrito-backed bonds’, with visions of a consumer drunkenly clicking ‘buy now, pay later’ for an order of chips at 3am that they don’t really want.
That makes it sound like a sector that should be regulated and now in the UK, it will be.
“Concerns can be exaggerated, [but] they are not wholly unjustified,” argues Tom Hall in a leader this week, putting the case that this regulation could be the making of BNPL as public asset class.
Private deals, portfolios sales and SRTs have all happened, but nothing in the European public securitization market so far.
It’s worth noting that, although the FCA predicts its rules will slow the sector, the regulation was welcomed by the large market players Tom spoke with this week.
As ever, the US, where the asset class is more developed, offers something of a template. Just this month, Sunbit priced a deal with loans for everything from auto repairs to dental care. Affirm is a regular issuer, while Cherry Technologies priced a deal last year backed by loans for elective medical procedures.
It’s a long way from burrito bonds, but still the ESG implications take a bit of working through. BNPL might offer flexibility to consumers and depending on the lender, a chance to build their credit history.
But fundamentally, offering such financing is a sales tactic from retailers, who are willing to pay interest and fees to close deals. Deals often come interest free, so it makes sense for the rational consumer with excess savings to take it up.
If you’re buying a new set of teeth for $2,000, why not pay three months later, put the money in a CLO ETF and pick up $30 for triple-A risk (based on returns of 1.52% of NAV in the last three months for the world’s largest CLO ETF - Janus Henderson’s JAAA).
But if retailers were only after those customers, it would be simpler to offer a discount. If you have to induce customers further down the affordability curve to buy things they otherwise wouldn’t have, you come to a greyer area.
And there you find the need for regulation.