Zip Co Eliminates Debt, Eyes US Expansion Amid Regulatory Scrutiny

Highlights:

• Debt Elimination via Equity Raising: Zip Co will use proceeds from a AU$217 million equity placement to eliminate its corporate debt, enhancing operational flexibility and simplifying its capital structure.
• US Market Expansion: Zip plans to accelerate growth in the US market with a new “Pay in 8” product, despite regulatory scrutiny from the Consumer Financial Protection Bureau (CFPB) regarding potential consumer protection law violations.
• Financial Turnaround: Zip expects to report core earnings of AU$67 million to AU$70 million for the year, a significant improvement from a AU$48 million loss last year, driven by strong performance in the US market.

Debt Elimination and Equity Raising

Zip Co (ASX: ZIP) has announced a significant move to eliminate its debt by paying a substantial break fee using funds raised from a new equity offering. The equity placement, set to raise AU$217 million, will settle next Monday, coinciding with Zip's return to the S&P ASX 200 index. Shares are priced at AU$1.52 each, a 5.3% discount to Tuesday's close, with the placement underwritten by Goldman Sachs and Unified Capital Partners.

“This is the last step in simplifying our capital structure,” said Zip’s CEO, Cynthia Scott, emphasizing that the equity raise will enhance operational flexibility by removing the corporate debt facility.

US Market Growth and Regulatory Challenges

Despite ongoing investigations by US regulators, Zip plans to accelerate its growth in the United States, where its buy now, pay later (BNPL) payments grew by 43% last quarter. Zip is introducing a “Pay in 8” product, enabling nearly 4 million American customers to finance larger purchases, such as travel and whitegoods.

The Consumer Financial Protection Bureau (CFPB) is investigating whether Zip's “convenience fees” should be classified as finance charges and if Zip's products qualify as credit cards, necessitating additional consumer protections. Zip is cooperating with the CFPB and aims to provide a comprehensive response to the allegations.

Financial Performance and Future Prospects

The early repayment of a AU$150 million debt facility, which includes an AU$89 million exit fee, is expected to save Zip AU$22.5 million annually in interest payments. Zip's core earnings for the year, to be reported on August 27, are projected between AU$67 million and AU$70 million, marking a turnaround from a AU$48 million loss in the previous financial year.

While Zip’s performance in Australia remains lackluster, with a 5.4% decline in active customers and an 11.4% drop in transaction value, the US market shows promising growth. Net bad debts have decreased to 1.4% of transactions, down from 1.9% a year earlier.

Zip shares, which were in a trading halt on Wednesday, have surged 160% this year, last trading at AU$1.60. Analysts are optimistic about Zip’s potential, noting the under penetration of BNPL products in the US market and the significant number of consumers underserved by traditional financial services.

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