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

Key Points

• Integration of Cash App (P2P) & Square (B2B) ecosystems: A closed-loop architecture reduces reliance on external intermediaries, where internal transaction processing directly enhances margins and anchors organic debt coverage.

• Business resilience through entire ecosystems due to the provision of a full suite of financial products/services: Square’s sticky, high-margin software subscriptions and Cash App’s resilient user base provide a structural floor for earnings stability across economic cycles.

• Operating leverage story playing out: Gross margin expansion from 28.8% (FY2020) to 42.8% (FY2025), with Adjusted EBITDA margin climbing from 5.0% to 14.1%, positions Block to deliver the guided 15% EBITDA margin in FY2026 as higher-margin services scale and AI-driven cost discipline takes hold.

• Lightly leveraged profile, supported by strong coverage metrics: Net Debt / Adjusted EBITDA of 0.06x and an interest coverage ratio of 26.8x provide a formidable margin of safety.

• Improving cash flows supports robust liquidity: Operating and free cash flow acceleration (post management’s strategic focus on profitability) ensure Block can self-fund operations internally, with US$7.86 billion in total available liquidity exceeding all outstanding borrowings.

• Attractive yields offered by short and medium expected tenor bonds: Block’s outstanding bonds provide 100+ to 200+ bps in yield pickup against comparable sovereigns and offer decent pickup compared to higher-rated peers (Fiserv and PayPal), representing solid risk-adjusted income from a credit improving toward investment-grade strength.

Company profile

Block, Inc. (NYSE: XYZ) is a US fintech leader bridging consumers and businesses through two increasingly interconnected pillars: Cash App (61% of gross profit) and Square (38% of gross profit) By owning both the consumer wallet and merchant’s terminal, Block creates a “closed loop” ecosystem that captures value at every transaction stage:

Cash App serves 59 million monthly transacting actives (MTAs) and has evolved from peer-to-peer (P2P) payments into a banking destination for underbanked populations. Square operates as the operating system for 4+ million merchants, offering integrated point-of-sale (POS), software, and financing solutions.

We focus our credit analysis on core Cash App and Square segments–which now generate 99% of gross profit–as lower-margin Bitcoin and hardware segments contribute negligibly.

Recent financials: Revenue Quality Over Headline Growth

Block delivered a resilient performance for its full year ending 31 December 2025 (FY2025) despite headline revenue remaining flat at US$24.19 billion (compared to US$24.12 billion for FY2024). We highlight meaningful improvement in revenue composition: a US$1.70 billion year on year (YoY) decline in volatile bitcoin revenue was offset by a US$1.77 billion (+12.7% YoY) rise in core segments.

Square’s ecosystem momentum remains robust: Gross payment volume (GPV) climbed to US$245 billion, with mid-market merchants (>US$0.5 million in annual GPV) now representing 44% of total volume–a key credit positive given their higher service adoption and lower churn.
Cash App’s deepened monetisation. Monthly transacting actives (MTAs) reached 59 million as of 31 December 2025, while monetisation deepened: gross profit per MTA rose to US$124 (see chart 1 below), driven by the group’s shift toward primary banking and higher-margin financial products. This user engagement and per-user profitability improvement directly supports organic debt servicing capacity.

FY2025 gross profits climbed 16.6% YoY to US10.36 billion, reflecting both strong business momentum and the operational efficiencies Block has embedded through its AI-driven cost discipline over the past year. We note that management has signalled a 40% workforce reduction for 2026, which we expect will further enhance operating leverage and profit generation moving forward, continuing a multi-year trend (see chart 2 below).

Adjusted EBITDA (which we view as a better reflection of underlying operating performance) rose 14.4% YoY to US$3.47 billion. This positive profit trajectory (see chart 2 below), anchored by strong Square and Cash App performance, bolsters Block’s debt servicing resilience.

Chart 1: MTA remains resilient, with increasing profitability

Chart 2: Increasing gross profits + EBITDA over the years

Integration of Cash App + Square ecosystems to drive cross-selling

Block’s closed-loop ecosystem creates a self-reinforcing flywheel that reduces reliance on financial intermediaries and structurally improves unit economics. We note this architectural advantage underpins the group’s organic debt servicing capacity.

On the Cash App front, the shift toward primary banking is yielding tangible results. Direct deposit users spend 6x more and generate 10x the gross profit versus peer-to-peer (P2P)-only users, with primary banking actives reaching 9.3 million in December 2025 (up from 8.3 million in September). This conversion strategy delivers high-margin revenue growth and strengthens the group’s earnings stability, ultimately bolstering its ability to repay its debts.

Square’s mid-market merchant push (now representing 44% of total GPV), see chart 3 below, is equally material for its credit profile. These higher-volume merchants adopt a broader suite of services (payroll, marketing, loyalty), driving profitability and reducing churn risk. As Block deepens these relationships, client stickiness improves, anchoring more predictable cash generation.

We think the credit benefit crystallises when these ecosystems interact: internal transaction processing between Cash App users and Square merchants eliminates external interchange costs, directly enhancing margins and organic debt coverage, further enhancing the group’s credit profile.

Additionally, we highlight that while Block’s expansion into lending and Buy-Now-Pay-Later (BNPL) introduces credit cycle exposure, this risk is meticulously ring-fenced through non-recourse special-purpose vehicles and warehouse financing. This structure ensures that lending defaults have no direct claim on Block’s core operating cash or assets. Block retains modest first-loss exposure (typically 5-10% of the loan) to maintain discipline, but the compartmentalised structure shields the group from stress. Additionally, the “micro-loan” nature of products like Cash App Borrow, which caps at US$200 per user, encourages consumers to prioritise these small, habitual payments over larger, discretionary debts.

Chart 3: Mid-market merchants make up an increasing percentage of Square’s merchant base

Business Resilience through Downturns

Block’s dual-sided ecosystem provides the group with inherent resilience, with structural characteristics that shield it from macroeconomic volatility and secure a reliable floor for debt servicing.

Square Merchant Ecosystem Resilience

Square is actively de-risking its merchant base through three primary pillars. First, the strategic focus on mid-market merchants (44% of total GPV) provides a superior credit profile compared to Block’s historical reliance on micro-merchants (<S$0.5 million in annual GPV). These larger entities typically possess more diversified revenue streams and stronger liquidity buffers, making them significantly more resilient during downturns.

Next, Square’s gross GPV is heavily concentrated in “needs-based” categories, which we believe exhibit resilience through economic cycles. Approximately 35% of volume is from food and drink, and 10% from beauty and personal care. These sectors tend to exhibit more resilient demand even during downturns, as consumers continue to prioritise essential services.

Finally, the sticky nature of Square’s integrated software suite provides high-margin, predictable, recurring revenue. Services like Square Payroll, Inventory management, and shift scheduling are mission-critical; they are the “brains” of the business. Block has observed that once a merchant adopts four or more Square services, retention rates skyrocket because the operational friction of switching to a new provider is too high.

Overall, we like Square’s structural resilience as it secures the floor for interest coverage. By moving from transactional one-time processing fees to recurring software subscriptions, Square has strengthened the quality of revenue and earnings from its merchant base. For bondholders, this translates to a more predictable stream of cash available for debt servicing.

Cash App ecosystem resilience

Cash App serves as the primary banking tool for underbanked populations, who rely on it for essential financial services regardless of economic conditions. This creates a baseline of activity that is largely acyclical. Indeed, this resilience was strikingly evident during the pandemic, where MTAs doubled, from 24 million in late 2019 to 44 million by the end of 2021 and remained robust during the inflationary shock of 2022 and 2023 (see chart 3 below). Despite fears of a pullback in lower-income spending, user engagement deepened as customers turned to the platform to manage strained budgets. The growth in high-margin, high-engagement services such as Cash App Borrow–which provides small-dollar, short-term loans (capped at US$200 per user)–and Afterpay further solidified this loyalty. These services drove increased profitability (Cash App gross profit rose 30% YoY in 2022 and 33% in 2023), and embedded users deeper into the ecosystem, making the platform stickier during periods of financial stress.

For bondholders, this deep-seated ecosystem resilience provides a significant layer of protection. The acyclical nature of the user base ensures a resilient, recurring revenue stream that acts as a buffer against macroeconomic downturns. Furthermore, the focus on small-dollar, high-velocity credit products (like Borrow) reduces the risk of large-scale defaults, as the exposure per user is strictly managed. This unique combination of essential service utility and disciplined credit scaling supports the earnings quality of the group, reinforcing Block’s ability to service its debt obligations over the market cycle.

Block’s information advantage is its strongest defence against credit deterioration. By monitoring real-time transaction data across both the Square and Cash App ecosystems, management has live visibility into merchant health and consumer spending. This allows for near-instant underwriting adjustments, which, combined with short loan durations of 6-8 weeks, allows Block to tighten its lending portfolio at the first sign of a macro slowdown. The effectiveness of this real-time agility is evident in the group’s 2020-2025 metrics (see Table 1 below). While the Provision for Credit Losses as a percentage of gross profits stabilised at 18.70% in FY2025, the 60-day consumer delinquency rate improved to a record low of 1.05%. With a consistent 96% Afterpay on-time rate and a Square Loan loss rate of <3%, the lending segment is well-protected. Having said that, bondholders should be mindful of the possibility that in the event of heightened credit stress, these metrics could weaken materially, which would cause Block’s credit profile to deteriorate.

Table 1:

Metric	31 Dec 2020	31 Dec 2021	31 Dec 2022	31 Dec 2023	31 Dec 2024	31 Dec 2025
Metric	FY2020	FY2021	FY2022	FY2023	FY2024	FY2025
Provision for credit losses (% of gross profits)	14.2%	11.1%	17.6%	20.4%	19.8%	18.7%
60-day delinquency rate (Cash App)	NA	NA	1.4%	1.2%	1.1%	1.1%
Cash App repayment rate	NA	97%	97%	97%	97%	97%
Afterpay on-time payment rate	NA	NA	96%	95%	95%	96%
Square Loan Loss Rate	4.1%	2.8%	<3.0%	<3.0%	<3.0%	<3.0%
Source: Company Data, iFAST compilations. Data as of 31 December 2025

Growing profitability and Operating Leverage

A central pillar of the credit case for Block is the group’s demonstrable shift toward sustained, profitable growth. Management has pivoted from a “growth at all costs” mindset to an explicit focus on profitability (late 2023 – start of 2024). As seen in chart 4 below, gross margin rose from 28.8% in FY2020 to 42.8% in FY2025; a growth that has flowed down to Block’s core earnings, with Adjusted EBITDA margin also rising from 5.0% to 14.1% over the same period. Block’s increasing profitability is underpinned by two structural drivers: 1) increased contribution from higher-margin revenue streams–think subscription and services, Cash App Borrow, and Afterpay merchant fees–and 2) increased cost savings through the leveraging of AI.

Looking forward, management expects the group’s adjusted EBITDA margin to inch higher to 15% for FY2026. We believe this is highly achievable given the increase in sales of higher-margin services and management’s recent implementation of cost-efficiency measures.

Chart 4: Steadily improving profitability margins

Improving cash flows supports robust liquidity

On the cash flow front, Block has demonstrated a consistent ability to convert growing profits into tangible cash flows (see chart 5 below). Since management’s shift to profitability, OCF rose from US$1.01 billion in FY2023 to US$2.58 billion for FY2025. By maintaining disciplined capex, free cash flow (FCF) has mirrored this trajectory, ballooning from US$500.20 million to US$2.42 billion over the same period. Beyond this rapid growth, we like that Block has been able to consistently produce solid, positive cash flows, which ensures the group can fund its operations internally rather than excessively relying on capital markets.

Overall, Block has a robust liquidity profile. As of 31 December 2025, Block has US$7.08 billion in cash and short-term investments, against a gross debt position of US$7.29 billion. While the group has technically moved from a net cash to a slightly net debt position over recent years, this is a function of strategic debt issuance rather than operational softening. When factoring in an undrawn revolving credit facility of US$775 million, Block’s total available liquidity of US$7.86 billion provides over 100% coverage of all outstanding borrowings.

Looking forward, we expect cash flow generation to remain robust. If management maintains Capex at the guided 1% of total revenue, FCF will continue to scale alongside the expected improvement in OCF due to higher-margin, larger merchant services sales. Do note that US$450 million – US$500 million is earmarked as restructuring expense for the 40% reduction in workforce mentioned above. For bondholders, this self-funding capacity ensures Block has the financial flexibility to navigate macroeconomic volatility while comfortably meeting all future principal and interest obligations.

Chart 5: Accelerating cash flow since management’s pivot to profitability

Decent credit profile meets strong interest coverage

Block has maintained a remarkably steady leverage profile (Table 2 below) over the last five years, anchored by a disciplined approach to capital structure. A standout feature of management’s strategy was the US$29.0 billion acquisition of Afterpay in 2022; by completing this as an all-stock deal, Block avoided the “debt-heavy” pitfalls common in mega-mergers, preserving its credit integrity. We view this preference for equity-linked financing as a significant long-term credit positive. As of 31 December 2025, Block has a Net Debt / Adjusted EBITDA stands at a negligible 0.06x. While this metric has moved slightly from its historical net cash peak (see Table 2 below), this shift is purely a function of strategic debt issuance rather than any operational deterioration. In fact, Adjusted EBITDA has never been stronger, a trend we expect to continue in the future.

The group’s ability to service its debt remains strong. Despite the rise in interest expenses from recent bond issuances, the interest coverage ratio (Adjusted EBITDA / Interest Expense) stands at a formidable 26.8x (see Table 2 below). This level of coverage provides a massive margin of safety for Block to service its interest obligations.

Furthermore, Block’s debt maturity profile is well-staggered (see chart 6 below), ensuring the group faces no immediate liquidity cliffs. No more than US$2.0 billion is due in any single year, a sum easily covered by the group’s US$7.08 billion cash pile and its US$2.42 billion in annual free cash flow. This combination of low leverage, high coverage, and a balanced maturity runway effectively minimises refinancing risk. Overall, we are highly comfortable with the group’s credit metrics, as they reflect a business well positioned to handle macroeconomic volatility without compromising its credit profile.

Chart 6: Comfortable debt maturity profile

Table 2: Net debt / adjusted EBITDA + ICR over the years

Credit Metrics	31 Dec 2020	31 Dec 2021	31 Dec 2022	31 Dec 2023	31 Dec 2024	31 Dec 2025
Credit Metrics	FY2020	FY2021	FY2022	FY2023	FY2024	FY2025
Net debt / Adjusted EBITDA*	-2.67x	-0.74x	-1.07x	-0.96x	-0.78x	0.06x
Adjusted EBITDA / Net Interest Expense (ICR)	8.33x	30.60x	27.35x	-37.96x**	325.63***	26.80
Source: Company data. iFAST compilations. As of 31 December 2025 : negative figures are due to the group’s net cash position (net debt = gross debt – cash) : FY2023 net interest expense was negative as interest income was greater than interest expense **: FY2024 ICR was inflated as the group repaid most of their debts in FY2023 and FY2024, leading to lower net interest expense

Recommendation

Table 3: Attractive yield pickup compared to peers

Issue	Issuer	Ask Price	Yield to Worst (%) / Yield to next call (%)	Expected Tenor	Credit Rating (S&P / Fitch / Moody’s)
XYZ 3.500% 01Jun2031 Corp (USD)	Block Inc.	91.29	5.45% / NA	5.02	BB+ / BBB- / Ba1
XYZ 6.500% 15May2032 Corp (USD)	Block Inc.	100.85	6.19% / 8.44%	1.16	BB+ / BBB- / Ba1
XYZ 6.000% 15Aug2033 Corp (USD)	Block Inc.	98.38	6.28% / 7.91%	2.41	BB+ / BBB- / Ba1
FISV 5.350% 15Mar2031 Corp (USD)	FISERV	101.01	5.11% / NA	4.83	BBB / - / Baa2
FISV 5.600% 02Feb2033 Corp (USD)	FISERV	108.38	5.35% / NA	5.88	BBB / - / Baa2
PYPL 4.400% 1Jun2032 Corp (USD)	Paypal	98.29	4.72% / 4.73%	5.95	A- / A- / A3
PYPL 5.150% 1Jun2034 Corp (USD)	Paypal	99.80	5.18% / 5.18%	7.95	A- / A- / A3
NA: Bonds do not have call dates Data as of 19 Mar 2026 Source: Bloomberg, Bondsupermart, iFAST Compilations.

Overall, Block maintains a solid investment-grade rating. As a testament to the group’s increasing profitability and solid cash generation, Fitch ratings upgraded the issuer and its senior unsecured bonds to BBB- from BB+ in August 2025. Moving forward, we expect Block to maintain its credit profile, with scope for improvement as OCF and FCF pick up from higher-margin services sales and continued disciplined management continues to outpace the group’s modest capex requirements.

We highlight three outstanding bonds from Block (see Table 3 above). With expected tenors ranging from 1.16 years to 5.02 years, these issues provide a decent 100+ to 200+ bps yield spread over comparable US treasuries. When compared to close industry peers like Fiserv and PayPal, Block’s bonds provide a decent yield pickup of 100+ bps bps for similar tenors. Note: Both PayPal (A- by S&P) and Fiserv (BBB) have higher credit ratings than Block.

Overall, we think these outstanding Block bonds present a solid yield opportunity for investors seeking high-quality, decent income from a stable issuer.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds NIL position and the analyst who produced this report holds 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.

All Contents here in do not constitute financial advice or formal recommendation and must not be relied upon as such. Bondsupermart and its Information Providers are not giving or purporting to give or representing or holding ourselves out as giving personalised financial, investment, tax, legal and other professional advice. Please read our full Terms and Conditions section on the website