Peloton bike loans peddled to eager Wall Street shoppers

Updates from Peloton Interactive LLC

Wall Street has found a way to access some of America’s safest consumers: debt slices backed by bundles of loans for people who buy the popular Peloton fitness bike.

Affirm, a market leader in “buy now, pay later” services where customers pay for products in installments, has sold hundreds of millions of dollars in loans for Peloton equipment like indoor bikes, shoes. of bike and weights, according to people familiar with the transactions.

Since 2020, the company has raised more than $ 2.2 billion through six deals; three that roughly mirror Affirm’s larger loan portfolio and three that bundled zero-interest unsecured loans primarily to Peloton clients, these people said. They total $ 845 million.

The senior tranche of the latest Peloton d’Affirm-backed transaction, the most protected against the default of the underlying borrowers, offers a coupon of just over 1%, or about 0.2 percentage point more than an equivalent US government obligation at the time the transaction was established. in April.

The deals highlight some of the financial magic that helped fuel the buy now-pay boom later in the pandemic-triggered online shopping surge, while low returns suggest investors want gain exposure to some of the highest rated individual borrowers. in the USA.

Peloton had benefited during the pandemic from an increase in home fitness. Its static bikes are some of the most expensive on the market, with prices starting at $ 1,495 and going up to nearly $ 3,000 with accessories. Customers tend to be wealthy with very high FICO scores, a measure of the quality of US consumer credit, and the loans have a history of very low default rates.

Affirm offers zero interest loans on Peloton purchases, from 12 to 43 months. Peloton provided approximately 20% of the online lender’s $ 870.5 million in revenue in the fiscal year ended June 30, 2021.

Some of the loans go through Wall Street’s securitization machine, conditioned to back up payments on new debt tranches purchased by investors, including asset managers like DoubleLine Capital and insurance companies like MetLife, according to the reports. fund declarations.

Francisco Paez, head of structured products research at MetLife, said the products were particularly popular with insurers looking for “secure and predictable cash flow.”

“Given the current pricing environment, we see these particular securitizations as attractive because they offer high value relative to the amount of risk,” Paez added.

The deals are part of Affirm’s broader strategy to raise additional capital by securitizing the loans it has made – not only to customers of Peloton, its largest partner, but to a multitude of consumers at more than 11,000 traders, according to DBRS Morningstar rating documents. .

Affirm does not publicly disclose the loan mix of the securitizations it sells, let alone disclosed for Peloton loan-backed transactions as they were placed privately with investors.

However, according to DBRS rating documents for Affirm’s latest $ 500 million deal that included loans from Peloton and other traders, the securitization included more than one million individual loans with an average initial balance of $ 585. Due to the short-term nature of the loans, with an average term of less than one year, the agreements are replenished with new loans that Affirm will issue until the maturity of the agreement, which is set at 2026 but could happen sooner.

“At the end of the day, the performance is so good because of the underwriting,” said Imran Ansari, who led the ratings for the deal at DBRS Morningstar. “The loans are low balance with low monthly payments, which reduces payment stress for borrowers.”

Representatives for Affirm and Peloton declined to comment. DoubleLine declined to comment.

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