New York-Based Goldman Sachs Group extends credit line for a massive 1.5 billion Brazilian reais or US $270 million to Open Co, a Brazilian Fintech that specializes in making unsecured loans to individuals throughout the country. The major Wall Street bank is providing a billion of the reais while the rest will be raised from local investors in Brazil. All this according to Raphael Zagury, Open Co’s Chief Financial Officer. The CFO stated that the funds obtained from the extended credit will be used to expand again after the coronavirus pandemic had forced it to restrain itself from lending.
The company was founded earlier this year as a result of a merger between Geru, a startup that offers credit to, what they refer to as, “more established individuals,” and Rebel, another fintech startup that provides loans to Brazil’s youth population. Open Co uses machine learning and artificial intelligence to analyze credit. Its primary aim is to provide cheaper loans and reach Brazilians not being serviced by its traditional banking system. During the pandemic, both companies reduced their lending offers by about 50% in March and April of 2020 as rates in delinquencies for first installments on loans doubled to 10%! “We were able to control the bleeding,” the 44-year-old CFO said, adding that the firm’s credit models proved accurate, and nonpayment rates are back to 4%.
Many of Brazil’s borrowers have struggled to pay down debt amind the COVID-19 pandemic with an astonishing 14.3 million unemployed, a record for the country, as well as an additional 5.9 million who have dropped out of the labor force and stopped looking for work altogether. As a response, many of Brazil’s biggest financial technology companies are consolidating. “Our main challenge now is to grow again,” Zagury said.
Rebel and Geru have loaned approximately 1.5 billion in reais total to around 100,000 clients, and the goal is to provide another one billion reais in credit this year. As of right now, Open Co has 170 employees and with the funding from its investors, plans to hire another 80.
The one and a half billion is being funded through an FDIC, a fund that will purchase receivables from Open Co in a transaction similar to a securitization. The senior tranche of the fund will be purchased by Goldman Sachs and Open Co, along with the pool of local investors, will take the remaining mezzanine layer, a risker hybrid of debt and equity.
This isn’t the first interaction between Goldman and Open Co, in March the company received 150 million reais in equity investments along with International Finance Corp, the financial arm of World Bank.
Brazil has been a hotspot for private equity and venture capital funds that in the first three months of the year invests a total of 10.7 billion reais, almost two billion in USD. Of all the sectors this money is being sent to, the financial sector is consuming almost one-fourth of it.
“In addition to expanding credit, we’re also looking around, because there is a gigantic acquisition opportunity for us,” Zagury said. “There are a lot of good companies — with top technology, good people and good structure — but that are lacking capital right now.”
Lucchesi, Christine. “Goldman Leads $270 Million Credit Line for Brazilian Fintech.” Bloomberg, 19 Apr. 2021, www.bloomberg.com/news/articles/2021-04-19/goldman-leads-270-million-credit-line-for-brazilian-fintech.