Zip Co raises $25m, taps Goldman Sachs

Zip Co co-founder Larry Diamond. Picture: Supplied

Buy now pay later service provider Zip Co’s $25m raising substantially reduces its financial risk around its $330m convertible bond, but many in the market say that the company is not out of hot water yet.

The raise through Goldman Sachs comes only three months after it said it had no plans to tap the market.

Yet some believe that further pain is to come for the Buy Now Pay Later sector from an earnings perspective across the board, as it faces regulation.

The company’s market value is close to $400m, despite it yet turning any meaningful profit and the question always remained how it was going to meet its liability around the bond.

On Thursday, it announced its shares were being sold at 47c each, after they last traded at 50.5c each, making the deal a 6.9 per cent discount.

The company will use the proceeds to partly convert some of the original $330m worth of convertible notes it took out, with holders agreeing to convert at 47.5c in the dollar.

It will issue shares and make a cash payment of $17.4m at a total cost of $39.9m.

The outstanding amount of the notes was $290.1m and would be reduced to $137.8m following on from the raise.

Overall, the face value of Zip’s convertible note liabilities has been reduced by $192.2m from a total of $390m to $197.8m.

The deal is subject to shareholder approval at an extraordinary general meeting in July and the company has reaffirmed guidance to be cash positive from an earnings before depreciation, tax and amortisation perspective by the first half of the 2024 financial year.

DataRoom reported in March that Zip Co could be in search of money funding, but the company denied it would be raising capital.

It made a $241m statutory loss for the six months to December and had cash losses of $33m in the half, leaving it with $78.5m of total cash and liquidity at December.

The $330m worth of bonds were due to be repaid in 2025.

Some believe that with a marginal profitability forecast in the next two years, there was no way that the internal cash generation would be enough to pay the liability.

During the half, the company paid $43m to retire $40m of interest-bearing notes in September last year.

It also retired $70m of convertible notes for 23c in the dollar in December, and some say the fact that the company was able to do this shows that the noteholders do not have an expectation that they will get the full value back on their investment.

The group has been retreating from international markets, as first revealed by DataRoom, operating in the United States, Australia and New Zealand.

This was after targeting 14 countries for international expansion.

Yet some believe the company would be better off also shutting its US business in its quest to push for profitability and preserve cash.

Zip said the US remained a core market and continued to deliver strong results.

Co-founder, managing director Larry Diamond, relocated to New York in November.

The company raised $400m in April 2021 to fund growth and raised $12m in December through Shaw and Partners to pay for the redemption of some of its convertible notes early.