After routinely investing in Affirm Holdings' publicly issued asset-backed securities, PGIM Fixed-Income and the consumer payment network recently announced an inaugural $500 million private deal that retains public-deal elements.
Unlike privately structured transactions, the pass-through structure allows participants to leverage operational efficiencies from securities, including in allocations, ratings, and leverage. The mix of assets also provides a broader mix of Affirm's originations than either of the company's securitization shelves.
"This is a way in which the public and private markets are partnering to deliver value from a risk perspective," said Brooke Major-Reid, chief capital officer at Affirm. "Financing partners may need a transaction to be structured in a particular way, so using the plumbing of the banker network helps us meet our funding and their structuring needs."
To conduct the deal, Affirm sold loans on its balance sheet to a special purpose vehicle (SPV) funded and eventually purchased by PGIM, which then allocated the investment to clients. According to a Form ABS-15G, Morgan Stanley advised on the transaction, providing services including helping structure the SPV and seeking ratings.
Affirm's ABS structuring team worked closely with PGIM and the bank to structure the deal to meet the needs of the parties involved. From Affirm's perspective, said Major-Reid, the public/private hybrid deal helps strengthen its relationship with PGIM and diversify its funding sources. PGIM is a long-time investor in Affirm's $10 billion in ABS issuances.
From PGIM's perspective, she said, the private-deal loan portfolio profile more broadly represents the credit of the loan asset than the ABS issued from its two shelves. In addition, it provides an attractive investment for PGIM's clients, and it helps the asset manager better understand the credit risk and behavior of Affirm's borrowers, enabling it to act quickly when Affirm issues public ABS.
"We work really hard to develop those partnerships—rather than a take-it-or-leave-it approach—and that ideally evolves into their participation across different areas of our funding ecosystem and supports our growth," Major-Reid said.
Edwin Wilches, managing director and co-head of securitized products at PGIM Fixed Income, said that in such deals, banks may act as a placement agent, structuring advisor, or other role, but their legal role in the deal is much less. However, in addition to providing those important functions, banks get insight into the price at which asset managers such as PGIM are buying loans, and potentially the loan originator's future financing needs.
"This is a permutation of an ongoing theme where banks' purpose is to facilitate financing and maybe do senior financing, but they're taking less first-loss risk," Wilches said.
PGIM Fixed-Income manages more than $120 billion in private and public securitized credit.
