Credit Update: A record 2QFY2026 and a shift to net cash keep us positive on Block’s USD 5+% bonds

We previously initiated coverage and provided a first-quarter update on Block’s bonds earlier this year:

Idea of the Week: The missing Block for your US Fixed-Income portfolio

Credit Update: Block’s increasing profitability for 1Q26 makes its USD 5+% bonds even more appealing

Block has since reported for the second quarter ending 30 June 2026 (2QFY2026). Below, we dive into the numbers and set out where our view on the bonds now sits.

1. A record quarter for core profitability, with the restructuring drag now fading

• The second quarter, in our view, again shows the operating leverage we have flagged since initiation coming through. Headline revenue was up only 9.3% YoY to USD $6.6b, but we would look past that figure: strip out Bitcoin and revenue climbed 21.7% YoY to USD $4.7b. The Bitcoin line is the culprit behind the soft headline, with revenue falling 12.8% YoY to USD $1.9b; that said, given this business earns a thin margin (~2%), we do not account for this segment’s performance in our assessment of Block’s credit profile. The cleaner gauge of the health of Block’s core commerce and financial-solutions engine is gross profit: this metric rose 25% YoY to USD $3.2b, with margins widening to 47.8% (2QFY2025: 41.9%). Most of the widening is a mix of low-margin Bitcoin shrinking as a share of revenue, alongside core segments nudging their own margins up a touch too.

• Operating expenses climbed 32.5% YoY to USD $2.7b, yet we see little sign of structural credit strain behind that number. The bulk sat in items we would treat as non-core – chiefly USD $365m of contingencies, restructuring and other charges. These charges are largely one-off and sit outside the group’s operating cost base.

• Transaction, loan and consumer receivable losses were another swing factor, up 99% YoY to USD $585m — but this is largely due to fast lending growth, where accounting treatment requires reserves to be booked upfront, not a signal of weaker credit (underlying loan loss rates and portfolio credit performance remained stable). We would point to two encouraging offsets: product development expense fell 16% YoY as February's reorganisation took hold, and total operating expenses softened from USD $3.1b in 1QFY2026. To us, that suggests the bulk of the restructuring work is now in the rear-view mirror.

• Look through that noise and profitability is gathering steady pace. Adjusted EBITDA is our preferred gauge of core profitability as it strips out non-cash items such as depreciation and lumpy, one-off expenses, such as restructuring and contingency charges. On that measure, adjusted EBITDA surged 31% YoY to a record USD $1.2b, and the margin (adjusted EBITDA / revenue) widened to 17.7% (2QFY2025: 14.7%). Management also lifted full-year guidance, now pointing to USD $12.51b of gross profit (+21% YoY) compared to 1QFY2026’s already increased guidance of USD $12.3b. We read this further upgrade in full-year gross profit guidance as a sign that the profit engine is running smoothly.

• Lastly, we note that net income for the quarter slumped 84% YoY to USD $88.5m (2QFY2025: USD $538.3m). This is mainly due to elevated legal contingencies, restructuring charges, and a larger credit provision (faster loan growth necessitating upfront reserving requirements), and a swing in the mark-to-market on Block’s bitcoin holdings (unfavourable swing of ~USD $301m). For bondholders, the key takeaway is unchanged: core underlying profitability, as measured by adjusted EBITDA, for Block remains robust.

2. Monetisation of ecosystem is trudging along well, with product launches picking up steam

• Cash App gross profit advanced 31% YoY to USD $2.0b. Monthly Transacting Actives (MTAs) held at 59m, but we think the more telling number is primary banking actives rose 17% YoY to 9.4m. These are the customers who treat Cash App as their main banking relationship, who contribute 10x more in terms of gross profit than a casual peer-to-peer MTA user. The lending engine did much of the heavy lifting: consumer lending originations (loans underwritten) grew 59% YoY to USD $18.9b, on the back of Cash App Borrow. Reassuringly, management was explicit that cohort-level loss rates stayed healthy, and that the YoY rise in lending losses should ease over the rest of 2026 as the Borrow book matures. Commerce enablement volume rose 17% YoY to USD $56.5b, with monetisation ticking up slightly YoY to 1.65%. On balance, we read the lending ramp as monetisation positive, though we remain watchful on loss trends.

• Square gross profit rose 13% YoY to USD $1.2b, excluding hardware. Gross payment volume (GPV) led the way, up 13% YoY to USD $72.8b. More encouragingly, the US GPV (Square’s largest market) re-accelerated to +9.8% YoY – the quickest pace since 2QFY2023 – while international GPV kept humming at +28% YoY. Within the mix, the mid-market cohort (sellers with more than USD $0.5m in annualised GPV) again grew the fastest, improving Block’s revenue quality. Monetisation was steady, with commerce-enablement (ex-hardware) rate at 1.23% while the financial-solutions rate came in at 0.41%. Overall, we think the steady monetisation rates, combined with faster growth in GPV, bode well for Block’s profitability moving forward.

• Looking ahead, the number of new products shipped by management reinforces our take on Block’s franchise durability: 130 features were launched in the first half of 2026, giving Block new ways to bring in customers. Cash App Tags sold out within hours and drew over 3m in waitlist sign-ups with no paid marketing, alongside Cash App Mobile, USDC stablecoin support, and Neighbourhoods, which now covers USD $1b of annualised seller GPV (+220% since March 2026). Together with raised guidance, this supports our view that profitability should keep building moving forward. The risks are not lost on us: a softer consumer and small-business backdrop and lingering tariff uncertainty would impact Block’s lower-earning users and smaller sellers the hardest. Even so, we think this risk is partially mitigated by the group’s deep liquidity, which serves as a comfortable cushion for debt service.

3. Deep liquidity with minimal refinancing risk

• Block’s liquidity profile remains robust, providing ample headroom for investing in growth and debt servicing. As of 30 June 2026, the group held cash and short-term debt investments amounting to USD $6.7b (excluding restricted cash of USD $893.6m), of which USD $6.4b is in cash and equivalents. Alongside an undrawn committed credit facility of USD $900.0m, total available liquidity stands at USD $7.6b. Against outstanding gross debt of USD $5.7b, we note that Block has swung to a net cash position.

• Block’s ample liquidity profile is further supported by continued strong cash generation; net operating cash flow rose 172.4% YoY to USD $1.0b (2Q2025: USD $374.3m). Even after accounting for a 70.0% pickup in capital expenditure (capex) to USD $53.2m, free cash flow still surged 181.8% YoY to USD $966.6m. Overall, Block’s ability to generate solid increasing cash flows from higher earnings is highly supportive of its credit profile.

4. A stronger credit profile with debt paid down into net cash, with coverage still comfortable

• Block’s already decent credit profile has improved since its 1QFY2026 results. Over the last three months, Block worked off USD$1.6b of senior notes and convertibles from its debt stack, trimming gross debt from USD $7.3b (31 March 2026) to the current figure of USD $5.7b as of 30 June 2026. Consequently, net debt / TTM adjusted EBITDA has therefore crossed into net-cash territory, an improvement on the 0.03x as of 31 March 2026, while gross debt / TTM adjusted EBITDA is modest at ~1.5x. Looking ahead, given management’s raised guidance of a stronger FY2026 performance, we expect Block’s credit profile to remain solid.

• Interest coverage, too, stays comfortable. TTM interest coverage ratio (TTM EBITDA / TTM net interest expense) remains decent at 20.0x. Although a touch below the 22.2x as of 1QFY2026, the slippage is benign in our view as it reflects lower interest income as the group channels spare cash into higher-yielding lending, not any increase in Block’s cost of borrowings. Looking ahead, we expect coverage to stay robust and build as Adjusted EBITDA compounds.

Recommendations

• Overall, we think Block’s credit profile has improved and remains solid, given strong operating performance, lower leverage and healthy coverage. We continue to think that adjusted EBITDA and operating cash flows should continue to trend higher, given the deepening integration of both the Cash App and the Square ecosystem. Likewise, free cash flow should continue compounding at a decent clip. That said, we continue to highlight the ever-present risks of higher inflation due to the Middle East situation and/or a slowdown in economic conditions. However, should the worst occur, we believe that Block’s ample liquidity (turning net cash this quarter) and healthy coverage should not result in a material impairment of its credit standing.

• Block's outstanding bonds trade at a yield-to-worst range of 5.5% to 6.0%, with expected tenors ranging from 0.72 years to 4.52 years. Against comparable US Treasuries, these issues provide an attractive 100+bps yield spread. When compared to close industry peers like Fiserv and PayPal, Block’s bonds provide a decent yield pickup of 60+ bps for similar tenors. Note: Both PayPal (A- by S&P) and Fiserv (BBB) have higher credit ratings than Block.

• Investors looking for higher yields from an issuer that is displaying an improvement in credit profile can consider these short- to medium tenor bonds from Block.

Table 1: Peer Comparison: 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in XYZ 6.500% 15May2032 Corp (USD) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.