Payment giant PayPal teams up with KKR, accounts receivable to be collected by KKR! PayPal boosts performance!

Payment giant PayPal is teaming up with asset management company KKR, with KKR set to purchase up to 40 billion euros of "buy now, pay later" (BNPL) receivables from PayPal. This deal will bring in $1.8 billion in revenue for PayPal, allowing it to increase its stock buyback by $1 billion in the second half of the year.

What is Buy Now Pay Later (BNPL)?

Buy Now Pay Later, BNPL, allows consumers to make purchases without immediate payment, instead opting to pay at a later date either in one lump sum or through installment payments.

BNPL has gained widespread popularity in recent years, especially among younger consumers who prefer to use installment payments when purchasing higher-priced items, making the younger demographic more willing to spend money. PayPal joined the BNPL trend in 2020 with PayPal Pay Later, issuing over 200 million loans to more than 30 million customers globally.

In addition, payment company Block, focusing on Bitcoin, entered this market by acquiring Australian payment provider Afterpay in 2021.

What are Accounts Receivable?

Accounts Receivable refer to the debt incurred from selling goods or services to customers. In the example of PayPal's BNPL, as PayPal allows customers to make purchases before payment, PayPal covers the consumer's expenses to the merchant upfront and then collects the payment from the customer. During the collection process, there is a possibility of bad debts, where customers may refuse or be unable to pay. While Accounts Receivable serve as a source of profit for PayPal by charging customers or merchants interest or fees, they also come with risks.

By the way, Accounts Receivable analysis is crucial in understanding a company's financial statements. If a company takes a long time to collect payments but has to pay the suppliers within a short period, it can lead to cash flow issues.

Collaboration Agreement with KKR

According to PayPal's report filed with the SEC, PayPal has signed an exclusive multi-year agreement with investment firm KKR, where KKR will provide a 3 billion Euro supplemental loan commitment. Under this agreement, KKR will purchase up to 40 billion Euros of BNPL accounts receivable issued by PayPal in France, Germany, Italy, Spain, and the UK. Per the terms of the agreement, KKR's private credit funds and accounts will acquire almost all of the European BNPL loan portfolio on PayPal's balance sheet at the transaction's close and will acquire future eligible BNPL loans. PayPal will continue to manage customer service related to its European BNPL products, including underwriting and subsequent services.

Through the collaboration with KKR, PayPal can remove outstanding accounts receivable from its financial statements, thereby improving its financial position. The quick liquidation enhances PayPal's cash flow, providing more flexibility for other uses. While there might be some discount in selling the entire debt portfolio, transferring the risk of bad debts to KKR allows PayPal to focus on its payment business. After all, managing accounts receivable is a complex task that requires adjusting pricing models according to market conditions, a task best left to the professionals at KKR.

The transaction is expected to be completed in the second half of 2023. Following the completion of the transaction, PayPal anticipates generating approximately 1.8 billion USD in proceeds, which will be used for increasing shareholder returns and general corporate purposes. After the transaction, PayPal plans to allocate around 1 billion USD for incremental stock repurchases in 2023, bringing the total stock repurchase amount for the year to 5 billion USD.

In the first quarter of this year, PayPal repurchased around 1.4 billion USD of common stock at an average price of 76.6 USD. These shares were repurchased in the open market under stock repurchase programs authorized between July 2018 and June 2022. As per the plan, there is still 14.4 billion USD available for future common stock repurchases.

Despite better-than-expected first-quarter results, investors seem unimpressed as PayPal closed at 66.94 USD yesterday, lingering near its lows. Whether the stock repurchases in the second half of the year can stimulate its stock performance remains to be seen!