JPMorgan just inked a deal with a startup to let airlines and hotels tap their loyalty programs for capital. Here's why it's a game-changer for cash-strapped companies.

  • JPMorgan just announced a deal with Affinity Capital Exchange (ACE), a venue for companies looking to secure debt financing via points programs like frequent-flyer miles.
  • Loyalty programs can be extremely valuable, but leveraging them to acquire capital has traditionally been a complex process only handled by banks and high-yield creditors.
  • Executives from JPMorgan and ACE said the venue streamlines loyalty financing. 
  • "When you think about this industry, it has been one that has been starving for innovation for a long time," Andreas Pierroutsakos, a managing director at JPMorgan, told Business Insider. 
  • Visit Business Insider's homepage for more stories.

 

One of the top investment banks in the world is partnering with a startup that helps companies use their loyalty programs to raise capital from institutional lenders. 

JPMorgan announced on Thursday it had entered into an agreement with New York-based Affinity Capital Exchange (ACE), a venue for companies looking to secure debt financing via points programs like frequent-flyer miles.

As a result of the deal, JPMorgan's clients will have access to a standardized way to turn their loyalty programs into capital. While companies have been able to leverage these programs for cash in the past, the process is far from streamlined, Andreas Pierroutsakos, a managing director at JPMorgan, told Business Insider. 

"We are creating liquidity in an asset class that has been viewed as the opposite of that … You have this amorphous asset class, and now we're creating bite-sized pieces," he said. 

"When you think about [loyalty financing], it has been one that has been starving for innovation for a long time," Pierroutsakos added.

Loyalty programs are valuable, but illiquid

Loyalty programs represent big money for companies.

The combined value of the 10 largest airline loyalty programs is more than $112 billion, according to a January report from On Point Loyalty, a consulting and investment firm that focuses on airline loyalty programs. The loyalty programs at Delta Air Lines, American Airlines, and United Airlines were all valued at above $20 billion, at the time.

However, valuation on paper is one thing; converting those assets into actual cash is another.

In order to secure financing via the programs, companies typically turn to either the card issuer tied to the program or spin off the loyalty program entirely, Pierroutsakos said. The ecosystem is full of one-off deals dominated by banks and high-yield creditors, he added.

Andreas Pierroutsakos, MD at JPMorganJPMorgan

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In July, for example, Goldman Sachs helped United Airlines raise $6.8 billion by pledging its frequent-flyer program. In September, Delta announced it was looking to raise $6.5 billion for its SkyMiles program via bonds and loans. 

Through ACE, more industry participants — including those on the buy side — will have the opportunity to participate in deals. 

"What we're trying to do is really create an enhanced, institutional point. A supercharged version of what currently works today," Pierroutsakos said. "We're looking to create something that is akin to a new asset class. One where it's investible beyond the current, what some would call, closed network that exists today."

ACE still needs to establish itself as an alternative financing option

For ACE, the deal is by far the biggest the venue has ever done from a distribution perspective, Atanas Christov, founder and CEO of ACE, told Business Insider.

And while Christov said the startup doesn't have formal projections on anticipated growth off the back of the partnership, he estimated it would amount to "billions of dollars worth of value" via intros into the venue made from the bank.

Atanas Christov, founder and CEO, Affinity Capital ExchangeAffinity Capital Exchange

With travel down considerably due to the pandemic, now would seem like an ideal time for companies to tap a venue like ACE. However, Christov said that there is still hesitancy to try out a new form of financing, especially in times of uncertainty. 

Read more: Wall Street banks are making millions from a fast-growing business that transforms unusual assets like Taco Bell franchises into bonds

That being said, getting a few marquee deals done will make this "a global opportunity," he added.

"We think that the legs of this particular solution are significantly longer and much more agile than the legacy securitization structure," he said. 

Pierroutsakos declined to identify specific clients that had shown interest in using ACE, but did say the addressable market is bigger than just airlines. Hotels, rental-car companies, and big-box retailers are also viable options for loyalty financing. 

And while companies still might choose to raise capital via traditional routes — like taking on more debt — Pierroutsakos said they will eventually reach the point where they are going to need to find another way to create liquidity that won't require immediate repayment. 

"We're providing an alternative in a more nuanced and potentially strategic solution versus just a financing solution to be able to extract more value and bring on other investors beyond the current investors that are there today," he added.

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