It has been a great day for the Zip Co Ltd (ASX: ZIP) share price.
In afternoon trade, the buy now pay later (BNPL) provider’s shares are up 7% to 75 cents.
This follows a rebound in the tech sector, which has seen the S&P/ASX All Technology Index rise almost 4% today.
However, despite today’s strong gain, there’s no getting away from the fact that the Zip share price is having a tough year.
For example, since the start of 2022, the BNPL provider’s shares are down over 82%.
What’s weighing on the Zip share price?
Tech valuations, the market’s aversion to loss-makers, and doubts over Zip’s pathway to profitability have been weighing on its shares this year.
Also potentially putting a bit of pressure on the Zip share price recently has been concerns over rising funding costs.
For example, as the AFR reports, Zip is currently looking to raise $300 million from debt markets to fund its receivables via the Zip Master Trust Series 2022-1.
A year ago, when Zip raised $650 million from the Zip Master Trust Series 2021-2, it was paying 0.9% to 6.3% margins. However, this time around, it is having to pay 1.95% to 12.5% margins for the $300 million.
What is unclear, though, is how much of this increase is driven by rising rates and how much reflects lending risks in the current economic environment.
The response
S&P Global has been looking at the offering and spoke reasonably positively about it. The ratings agency notes that some of the strengths of this offering are:
The relatively small average receivable size, which reduces credit exposure per borrower. That the receivables are generated through a diversified and large number of retailers and the portfolio is not overly exposed to any merchant, with the top exposure representing less than 2.3% of total transaction volume.
That the presence of a series-specific liquidity facility, in our view, mitigates potential disruption risks to timely interest payments on the rated notes during a servicer transition period following a servicer default.
However, there are some weaknesses that the agency has observed, which could be what is raising the cost of this funding. This includes:
That with an initial revolving period, the credit characteristics of the portfolio could change, potentially undermining the portfolio’s overall credit quality. This is partly mitigated by documented eligibility criteria and a specified limit on the addition of new receivables over 12 consecutive months, which limits the potential shift in the composition of the portfolio.
With the cash rate continuing to rise, it will be interesting to see whether funding costs go from here and what impact this ultimately has on margins and its profitability targets.
The post Raising funds outside the ASX comes at a cost for Zip appeared first on The Motley Fool Australia.
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More reading
- The Zip share price had another horror month. How much did it fall?
- Here are the 10 most shorted ASX shares
- Why is the Zip share price trailing the ASX 300 on Friday?
- Why did the Zip share price jump 4% today?
- How does Zip plan to become a cash flow positive ASX company?
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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