@CrazyCzech I’m glad we have a domain expert on the board. I’d love some clarity on some of your risks if you can provide them.
For context, I spent ~4 years working with another brand in a similar space, with a “better than FICO” assessment model. They were consumer-facing targeting the “new middle class”: those with lower FICO scores than are typically approved by banks, offering a range of loan products. To your point, these were high-interest loans, and yet the market for them is large and growing, because their only other option is payday loans which are facing their own legal hurdles as an industry. Anyways, this was a very forward facing message from them. It does take on a ton of risk, and it was not available in every state due to the constraints you mentioned.
Looking through PGY’s presentations, this doesn’t seem like what they’re doing at all. Maybe they are snakeoil salesman…is there something I’m missing here? The sales materials present like it is improved borrower evaluation tech across any type of loan. I agree that it’s more complex than my previous client, and I have very little knowledge on the institutional investment side of what they do, so I’m admittedly flying a little blind there. I was initially attracted to the company because I do believe FICO is outdated and the shifting financial makeup of the country suggests it’s a space to be majorly disrupted. And the numbers seemed more stable than UPST at a fraction of the cost, just waiting for a big catalyst (rates, partners).
My questions for you:
To your 1st risk, There are steady press releases on continuous ABS deals, is there anything happening on that side that would suggest it will slow?
To your 2nd risk, Do you have any info on what % of their loans are this type of high-interest loan, vs. something much “safer”?
They announced a partnership with a “top 5 bank” on October 25th, a week before their last report. I saw this as a big vote of confidence/legitimizer & potential catalyst for volume…one that I thought UPST would get first. Do you know anything that suggests we should be skeptical? Top 5 would suggest Citi, Wells Fargo, Bank Of America, US Bank or Chase.
I’m holding through earnings at the very least, but would love any color you can provide.
FWIW, I posted that observation in June. I had forgotten that I ever posted it so I had to find the message to see when I wrote that. But given that, June was not that long ago. Justifiably, it’s still within the boundaries of “near term.”
So what to make of it? Could be that IR was not fully informed (some companies purchase IR services from an external vendor). Could be that they weren’t candid when Bert spoke with them. Could be that the situation has unexpectedly changed. But keep in mind, so far as I recall, Pagaya management never actually stated that they would not need additional capital. It was an assumption based on available information at that time.
One thing seems apparent, Pagaya is not about to volunteer the answer. If it’s really important to you, you could write to IR and ask.
Kevin Mak at X, who teaches economics and investing at Stanford GSB, wrote this on X. I totally agree with him:
“Reviewing the details now but first look is “it looks bad, but it’s fine”. They’ve got 13-16% interest loans that they’re paying off by refinancing with convertible debt. The converts will have a much lower interest rate, and they’re expecting to save $30m/year of cash interest costs.
Of course, that means more dilution (at higher price levels since the strike on the convert will be highish).
You’re making a trade off to give away some of your future upside (via the extra dilution) to have more certainty now. Given the markets very negative view on the company, having a stronger cashflow stance now/today seems more valuable than the potential dilution.
Convertible debt offerings always “pressure the stock”, at least temporarily via implicit collusion (get the strike lower), hedging requirements (shorting to hedge) and just market mechanics. But fundamentally this seems neutral at worst, or positive.”
Yes, I agree with this. I think the AH reaction is overdone. This announcement seems positive to me - refinancing to get a better interest payment. It means they will be cash flow positive sooner than expected. That will bring in more institutional buyers and should lead to a much higher SP next year. I’ve held Pagaya for a long time now, probably too long, and I am still underwater on it. But I think this announcement will lead to better things for the stock and company in the future, so I contine to hold my 10% allocation.
I did message Bert and asked for his take on this. I expect he will put out a public statement but if I get a private response I will share that. I hope he will also provide an updated response from PGY investor relations and maybe shed light on why they felt they wouldnt be diluting again near term. I guess 18 months could be considered mid term?
Here’s a snapshot of what Bert has to say on the topic. Note that he added to his position yesterday.
Did not need to issue convertible notes.
Taking advantage of looser capital markets
Used this to pay down $270M of debt with high interest rates
Results in $30M of annual interest savings
Allows the company to achieve positive free cash flow 6-9 months earlier
Provides incremental revenue growth opportunity of 500 to 1000 bps (I should point out that this was Bert’s opinion and not that of the company)
11% dilution assuming shares trade 35% higher than today assuming a conversion price of around $17
That is pretty much it in a nutshell. I had a very small position prior to this and doubled that at around $9.40 yesterday.
Unlike UPST, the company seems to be performing very well. It is worth a small position for me to see if the business continues to perform and accelerate from here.
I don’t think Bert would mind me summarizing his thoughts here. However, I’d suggest subscribing to his service. Regardless of whether you agree with all of his stock picks, his analysis is excellent and generally gives the reader just about everything needed to make an informed decision.
Thanks for that summary, AJ, of Bert’s view on this. I also doubled my position on Pagaya yesterday, using some of the proceeds of my SMCI sale. My portfolio now stands at only 4 stocks:
NVDA 51%
PGY 14%
APP 9%
CLS 8%
CASH 18% (but this is just from the sale of SMCI, so I’ll look to redploy this soon).
My confidence in PGY increased after this decision to refinance these loans. Getting to cash flow positive a lot sooner than expected will cause more institutional investors to pile in. I can see the SP doubling or even tripling from here.
I took a starter position in Pagaya on Friday. I also got back into Upstart couple of months back. Yes, macro influences their performance but that’s starting to turn favorable. Both companies are executing fine on things they can control, AI disruption is here to stay (imo) and they were able to weather the storm over the last 2 years.
Few things about Pagaya
Two top 5 banks partners now (US Bank and undisclosed)
AAA rating on ABS (first for these kind of securities, provides 50-75 basis point uplift)
Solidifying other funding channels
Approve only 1% of their loans (seems very conservative, hence the the AAA rating?)