Zip shares frozen amid $267 million debt wipe plans

Zip Co Ltd (ASX: ZIP) shares are motionless this morning despite releasing a fourth-quarter update.

Whether you want to buy or sell, a trading halt prevents shareholders from doing either this morning. The need to hit pause on the company’s share price stems from another announcement released alongside Zip’s quarterly figures.

In addition to the buy now, pay later provider’s results, Zip has unveiled a capital raise. Not to make an acquisition or fund an expansion. No… Zip is rattling the tin to retire its existing corporate debt facility early.

Debt demolition with Zip shares

It appears that management hopes to tap into the enthusiasm following a sensational 273% ascension in the Zip share price over the past year.

Now valued at a market capitalisation of $1.8 billion, the company proposes raising roughly 15% of that by selling new shares in two parts.

The first part is a fully underwritten equity placement for $217 million. The second is a non-underwritten share purchase plan for eligible shareholders that will seek to raise a further $50 million, amassing a grand total of $267 million before costs if all goes to plan.

Shares will be issued at the higher option between $1.52 per share or ‘the price determined by a bookbuild process to be undertaken in respect of the placement’. Zip shares last traded at $1.605, meaning the $1.52 would represent a 5.3% discount.

According to Zip, the transaction will strengthen its balance sheet and reset its capital structure. Furthermore, paying down hundreds of millions worth of debt will provide flexibility and liquidity to ‘pursue further growth’.

The corporate debt facility has a limit of $150 million, and Zip had drawn down $130 million of it as of 30 June 2024. The debt’s maturity is set for December 2027, more than three years away.

What about the fourth-quarter results?

Defying the high interest rate environment, Zip achieved growth in the fourth quarter ended 30 June 2024. Financial accomplishments during the quarter include:

• Transaction volume up 19% year-on-year to $2.6 billion
• Revenue up 22.1% to $223.6 million
• Monthly transacting users up 6.1% to 2.1 million

As usual, most of Zip’s revenue growth came from the United States, increasing 46.8% to $121.5 million. For comparison, the Australia and New Zealand region only grew 1.8% to $102.1 million. Similar differences in growth were apparent for transaction volume and number of transactions.

Conversely, Zip saw its number of active customers slip in both regions. Consequently, total active customers decreased by 2.9% to 6 million.

Additionally, bad debts rose to 4.7% of Australian consumer receivables in Q4 — its second-highest level since June 2022. Despite this, cash earnings before tax, depreciation, and amortisation for FY24 are expected to be between $67 million and $70 million.

Zip held $353 million in total cash on its balance sheet at the end of June.

Zip shares are up 159% since the start of the year.

The post Zip shares frozen amid $267 million debt wipe plans appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler 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 Zip Co. 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.