00:00In this week's Big Take, Bloomberg has learned that investment firms including Blue Owl, KKR,
00:05and LE Investment are now pre-purchasing billions of dollars of consumer loans from buy now pay
00:10later companies. These deals are called forward flow agreements and they're raising concerns.
00:16Rene Ismail co-authored the story and he joins us now in studio. Rene, great to see you. I guess
00:21my first question is why are all these firms purchasing buy now pay later loans that haven't
00:26even been made and who benefits from that? I think there are benefits on both sides. For the private
00:32credit firms this is a great way for them to diversify away from your typical direct lending
00:37and move more into consumer credit which a lot label as a growing asset class. I think on the buy
00:43now pay
00:43later side this is a really attractive way for them to move risk off of their books which keeps them
00:49capital light. It helps them diversify their sources of funding and that's really supportive for their
00:55growth. Okay so it sounds great right now but this business model sounds similar to the lead up to
01:00the subprime mortgage crisis where investors wanted to buy mortgages so that banks could keep
01:05originating mortgages to feed that beast and it was this you know I forget the technical term for it but
01:11it just keeps going and going until something breaks and it resulted in a lot of loans that probably
01:16shouldn't have been made in the end and you're hearing similar things right? Yeah absolutely I mean
01:21anytime you have any sort of financial institution that's originating these debts packaging them up
01:27and then moving it in and around the system you're going to get parallels to the lead up to 2008
01:33but at the
01:34same time you have to be very cognizant of scale. If you look at the mortgage market at that time
01:38it was around
01:3810 to 11 trillion dollars but if you look at just from a gross volume perspective how big the BNPL
01:45space is it's really only
01:47between five and six hundred billion so much smaller much different scenario. Okay that's an important
01:51distinction I think the word I was thinking of was flywheel effect but what do ratings companies like
01:55Moody's think about this are are they sounding concerned? Yeah I mean I think you have to think
02:01about the risk in a couple layers first you have the scale of course but you also have this idea
02:07of
02:08cyclicality. In good times it's very easy for private credit firms to step into these deals and arrange
02:14these transactions but what happens when conditions get a bit choppier will they scale back and because
02:20these buy now pay later firms have so much capital to work with they essentially get to become machines
02:26where they can just focus on scaling their own platforms and getting these loans into consumers hands.
02:31Now we had you know decent job growth it certainly was a drop off in June from the prior months
02:37but the
02:38labor market is intact consumers however are under pressure with persistent inflation and living paycheck
02:44to paycheck we hear about it from companies all the time. What are the buy now pay later companies
02:48saying and showing when it comes to consumers being able to pay off their loans in time service their
02:54debt essentially? Yeah I think a lot of them are saying that non-payments continue to be manageable
03:00and at the end of the day you know the people that are using BNPL and this is a really
03:05important
03:06part for us to think about they skew lower income they skew younger and here's an interesting fact
03:11last year one in four BNPL users used BNPL services to purchase groceries.
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