Pagaya’s capital structure is under pressure as the fintech company is caught up in wider market concerns over private credit, AI and financial health of consumers.

The listed consumer lender has been expanding its partnerships with private credit groups like Blue Owl to diversify funding sources for the loans it underwrites using what it describes as an AI-driven approach. But the strategy means Pagaya is now exposed to an asset class that is suddenly out of favor on Wall Street.

“They are caught in the direct path of the storm,” said a buysider, who said the concern is that if private credit investors pull back, Pagaya would struggle to keep lending.

Pagaya told Debtwire in a statement that it has built a platform with access to deep pools of institutional capital. “Our network of partners continues to grow, and we remain fully confident in our balance sheet and our ability to consistently deliver for our corporate bond investors,” a representative said.

While private credit investors have become more disciplined in recent months, Pagaya stands to benefit as funds favor operators that deliver strong performing loans like Pagaya, said a source familiar with the matter. He added that Pagaya has a robust pipeline of demand and diverse sources of funding across public ABS and private markets.

Last year, Pagaya raised USD 10.5bn in capital with USD 8.5bn through ABS markets. On the private credit side, it struck multi-year forward flow agreements with Blue Owl and Castlelake to purchase consumer and auto loans. Sound Point Capital Management has since joined with a deal to buy point-of-sale loans.

Markets haven’t been rewarding the growth, though, with Pagaya’s USD 500m 8.875% USD 500m senior unsecured notes trading down since it released 4Q25 earnings in early February and stock declining nearly 50% over the past month.

Credit investors were caught off guard Monday (23 February) when the notes dropped eight points to 70.5 after falling five points last week, according to MarketAxess.

Market participants suspect investors have been shorting the unsecured notes, said a trader and the buysider. On Monday there was a suspiciously high volume of BWICs for the notes that vastly exceeded the actual number of trades taking place, said the trader.

The notes recovered by three points in heavy trading today (24 February), but they remain well below where they traded before the 4Q25 earnings report.

Pagaya bought back a small number of notes in the fourth quarter and is always considering the best way to invest its extra capital, said the source familiar with the matter, who noted that buying the bonds is an option if they offer an attractive yield.

One potential concern for investors is that the bonds arguably sit in an unattractive position in Pagaya’s capital structure, since a holder is effectively lending against the volatile subordinated residual interest Pagaya holds as part of its ABS programs, the buysider said. He added that Pagaya should be fine if its collateral continues to perform.

Pagaya takes on the credit risk since ABS rules require issuers to retain around 5% risk exposure. It also makes small discretionary investments. The company had USD 888m of credit risk as of 30 September, according to SEC filings.

Klarna, a leader in the buy now, pay later lending space that partners with Pagaya, said last week it had increased provisions for non-performing loans in 4Q25, sending shares down sharply.

Pagaya has told investors its own credit performance is meeting expectations with losses well below 2021 levels. The company generates the vast majority of its revenue from fees, not interest income, and bondholders are shielded from capital markets activity by its growing net income.

Private credit groups have increasingly moved into consumer lending and other types of asset-backed finance as an alternative to their traditional strategy of providing direct loans to mid-sized companies backed by financial sponsors.

This has allowed non-bank lenders like Pagaya to tap into a new funding source that doesn’t require them to retain credit risk.

Few asset classes and sectors, though, have escaped investors’ newfound worry about the potentially negative fallout from AI disruption.

On Monday, a viral essay by Citrini Research sparked concern about the wider impact AI may have on the US economy if companies rapidly replace white-collar workers with AI agents, leading to a decline in consumer spending and rising loan defaults. The report led to yet another decline in private credit groups’ shares along with technology and financial companies.

Some economic commentators, though, have cast doubt on the Citrini thesis since rapid productivity growth should increase consumers’ buying power, in turn boosting demand for goods and services.