(Bloomberg) -- Sixth Street agreed to buy as much as $4 billion of consumer installment loans from buy-now, pay-later lender Affirm Holdings Inc., marking the financial-technology firm’s largest capital commitment to date.
The deal will be in the form of a so-called forward-flow agreement, through which a buyer agrees to buy loans before they have been originated. With the transaction, Affirm will have access to off-balance sheet funding to support more than $20 billion in loan originations over the next three years, according to a statement seen by Bloomberg News.
Nonbank lenders have bought consumer loans in droves from buy-now, pay-later lenders including Affirm in recent months, as private-credit firms pick up interest in the $5.2 trillion asset-based finance market, which includes auto loans and residential mortgages. Earlier this month, Prudential Financial Inc.’s PGIM Fixed Income bought $500 million of loans from Affirm. Fortress Investment Group and Blue Owl Capital Inc., among others, have been scooping up similar debt portfolios.
The asset-based team at Sixth Street, run by partner Michael Dryden, has been active on this front, having previously agreed to buy Goldman Sachs Group Inc.’s GreenSky unit as part of an investor consortium.
“We look forward to being a key funding partner for Affirm and continuing to build on this relationship to support the company’s growth in the years to come,” Dryden said in the statement. Dryden, a former Credit Suisse Group AG banker, moved to Sixth Street more than two years ago.
Affirm shares climbed 3.6% to $71.22 at 9:39 a.m. in New York. They’ve surged 40% this year.
Buy-now, pay-later loans allow borrowers to pay in installments, sometimes with interest-free repayment periods. The concept boomed during the pandemic as consumers were stuck at home and saw more ads for the loans on shopping websites. This deal also comes as one of Affirm’s primary competitors, Klarna Bank AB, is preparing for an initial public offering in New York. Earlier this year, Klarna also struck a £30 billion ($39 billion) deal to offload buy-now, pay-later loans that it originates in the UK with a subsidiary of hedge fund Elliott Investment Management.
Affirm has various funding channels aside from loan sales and forward-flow agreements. The fintech is a regular issuer in the asset-backed bond market, where it repackages loans into securities of varying risk and size. The firm sold its latest deal in November, according to data compiled by Bloomberg. The Canada Pension Plan Investment Board has also committed as much as $1.4 billion to the company, according to an August letter to shareholders.
San Francisco-based Affirm — started by one of the co-founders of PayPal Holdings Inc., Max Levchin — has previously sold installment loans to other players, including regional banks. Levchin has said the firm’s credit quality remains resilient, though customer-delinquency rates are slightly higher than they were a year ago.
--With assistance from Paige Smith.
(Updates with Affirm shares in sixth paragraph.)
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