ASX buy now, pay later (BNPL) shares, such as Zip Co Ltd (ASX: Z1P), might find themselves short of funds in the new year, according to Grant Halverson, the founder and CEO of payments consultancy McLean Roche.
In response, ASX BNPL giants may need to turn to investors to garner the cash.
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Will 2022 dampen ASX BNPL shares?
Halverson believes rising interest rates may force BNPL companies to borrow at fixed margins above interbank lending rates to maintain their own loan books.
Additionally, the companies may be engaging in a 'race to the bottom' to get into the United States market. That will likely put their operations at a higher risk of bad debts and lessen their chances of receiving cheap loans.
That could leave ASX BNPL companies like Zip Co turning to the market to raise cash.
Let's test Halverson's theory and take a look at Zip's balance sheet, latest fundraising activities, and growth plans.
Zip is expanding worldwide
It hasn't been long since Zip last underwent a capital raise. In April 2021, the Zip share price temporarily dipped on news it was undergoing a $400 million notes offering to fund its international expansion plans.
And expand it has done. The company acquired European BNPL provider, Twisto Payments last month.
It also recently rebranded US BNPL company QuadPay, which Zip Co purchased in 2020.
Zip is also gearing up to finalise its acquisition of South African BNPL provider, Payflex early next year. Zip has also made moves to break into the Middle East, Philippines, and Indian markets.
The company hasn't flagged if it's still looking for new acquisitions in 2022.
Zip's financial position and share price
At the end of FY2021, Zip Co had about $330 million in cash or cash equivalents to its name. Its assets totalled approximately $1.1 billion. It reported $143.5 million in gross profits over the period.
For comparison, the biggest BNPL player on the ASX, Afterpay Ltd (ASX: APT), recorded a gross profit of about $675 million for FY2021. It ended the period with approximately $1.1 billion in cash and cash equivalents and approximately $2.6 billion in total assets.
In FY2021, the Zip Co share price experienced a wild ride. It soared to an all-time high of $14.53 on 16 February after trading at a 52-week low of $4.96 in December 2020. Overall, Zip shares increased in value by 42% from $5.30 on July 1 2020 to $7.57 on June 30 this year.
What's next for the Zip share price?
Whether ASX investors will be kind to Zip Co in 2022 is impossible to know. But according to reporting by the Australian Financial Review, Halverson says ASX BNPL shares could see higher bad debts in 2022. He says this may lead to lower credit ratings and higher funding costs.
Interested market watchers might want to keep an eye on interest rates and their effect on ASX players like Zip.
In early morning trade on Friday, Zip shares are fetching $4.92, down 2.96%. Afterpay is also trading lower at $96.58, down 3.68%.
