Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pagaya Technologies Ltd (PGY, Financial) delivered a strong quarter, beating guidance on revenue and adjusted EBITDA.
- The company achieved a critical financial milestone by making incremental volume growth contribute positively to total cash flow.
- Pagaya Technologies Ltd (PGY) expanded its network by adding new partners ahead of schedule, including a significant partnership with OneMain Financial.
- The company signed its first forward flow agreement with Castlelake for $1 billion in personal loans, enhancing capital efficiency.
- Pagaya Technologies Ltd (PGY) received its first AAA rating on its personal loan ABS program, reducing the cost of capital.
Negative Points
- Despite positive adjusted net income, Pagaya Technologies Ltd (PGY) reported a net loss of $75 million, primarily due to share-based compensation and fair value adjustments.
- Interest expenses increased to $22 million, reflecting higher secured borrowings and the addition of a term loan facility.
- Net credit impairments amounted to $58 million, driven by fair value adjustments on risk retention assets and losses on whole loans from past deals.
- The company continues to face challenges in managing macroeconomic conditions and consumer health, requiring close monitoring.
- Operational expenses remain a focus, with efforts to drive further efficiencies, especially in third-party vendor and consultant spend.
Q & A Highlights
Q: Congratulations on getting to this important milestone of being able to self-fund your growth. Can you elaborate on how you expect to utilize that? Do you feel like it takes care of all the opportunities in front of you? Or do you feel like you might still need to tap the markets from time to time?
A: (Evangelos Perros, CFO) We're very excited about the milestone where all our incremental volume is currently contributing positively to cash flow. The fees we earn are higher than the capital we're putting to work. We will continue to maintain expense discipline, and as volume grows, that's the path to get us to total cash flow positive. Once we reach that point, all future growth will be self-funded. (Gal Krubiner, CEO) This takes into consideration all the investments we need to make in new markets and other areas.
Q: Can you provide more color on the Castlelake relationship? Is this incremental to what you were thinking or is it supplemental?
A: (Gal Krubiner, CEO) We're very excited about this agreement. One of our key financial strategies is to drive capital efficiency. Deals like this forward flow agreement help us achieve our capital needs of 2% to 3% over time. There is significant demand from other parties for similar agreements, which gives us the ability to scale this program and expand the relationship.
Q: We're hearing a lot about the choppiness in the macro backdrop and the state of the consumer. What are you seeing?
A: (Sanjiv Das, President) Our experience shows that consumer performance has been quite stable. Our recent vintages have performed well, with delinquencies in auto loans at their lowest levels since 2022. While there is some softening in consumer spend, their ability to repay remains strong. We are watching macro trends closely and can adapt quickly based on the data we receive.
Q: Can you drill down on your forward flow agreement announcement? How do you orchestrate which funding vehicles are funding which loan volumes?
A: (Evangelos Perros, CFO) The forward flow agreement is aligned with our goal to drive capital efficiency. It covers about 20% of our current volume with minimal or no capital requirements. This program will scale over time, becoming more capital efficient. The pricing is reflected in our FRLPC, which we expect to be 3.5% to 4.5% going forward.
Q: How should we think about risk retention when you're trying to get issuance at the AAA level of quality?
A: (Gal Krubiner, CEO) The AAA rating lowers the cost of capital for our investors and reduces our risk retention requirements. Optimized ABS structures with 5% or less risk retention, combined with forward flow agreements, help us achieve a very low capital requirement of 2% to 3% over time.
Q: What assets and resources does Theorem bring to Pagaya? Also, could you share your perspective on the problems you solve for OneMain?
A: (Gal Krubiner, CEO) Theorem is an asset management firm focusing on consumer credit. They will have access to Pagaya's network, allowing their LPs to select from a wider range of assets. This provides additional funding diversification for Pagaya. For OneMain, we enhance their value proposition by extending our credit box, allowing them to scale their auto loan platform and eventually their personal loans.
Q: You've hit your target partner add much earlier in the year than expected. Can you talk about the partner pipeline and any changes to what you're looking for?
A: (Sanjiv Das, President) Our partner pipeline is strong across personal loans, auto, and point of sale (POS). POS has seen significant demand, evolving into a form of retail lending. Our business has become very enterprise-driven, allowing us to expand into multiple asset classes within a single organization. This strategy creates a moat once we are integrated into an enterprise.
Q: Is there anything to note on the FRLPC margin on POS versus consumer loans?
A: (Gal Krubiner, CEO) POS continues to be an investment area for us. While personal loans have the highest FRLPC, our goal is to grow asset classes like auto and POS and drive higher margins over time.
Q: How much of the stack does the AAA account for and what's the cost of capital or spread difference in AAA versus the prior rating?
A: (Gal Krubiner, CEO) About 40% of the capital stack has moved from AA to AAA, resulting in savings of 50 to 70 basis points. This makes us a strong, leading producer of personal loans with a competitive funding advantage. We expect the percentage of AAA to grow over time, further reducing our cost of capital.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
