‘Buy now, pay later’ leader Klarna cuts staff as prospect of rate hikes drives up borrowing costs


Swedish ‘buy now, pay later’ company Klarna Bank saw its borrowing costs rise to their highest level ever as rising interest rates hurt the company’s debt and equity valuations.

Europe’s most valuable fintech unicorn, of which Sebastian Siemiatkowski is CEO, has seen credit spreads on some of its adjustable-rate debt widening sharply in recent sessions as it looks set to slump $16 billion ($15 billion) in an upcoming funding round. EUR) on its valuation will accept .

The company said it was laying off employees, with about 10 percent of the workforce affected by cost-cutting measures.

Buy now, pay later (BNPL) companies, which allow customers to spread the bill for online purchases over months, are growing in popularity as people look for ways to contain rising costs.

But rising yields on corporate debt mean that business expansion comes with high costs that could deepen existing losses.

A Klarna spokesman said the company takes credit losses into account when structuring its loans. “We choose the level of risk that we are willing to take from transaction to transaction,” the spokesman said.

“The big question in the BNPL sector has always been the sustainability of business models in a more normalized credit and interest rate environment,” said Michael Taiano, analyst at Fitch Ratings.

Additional demand for BNPL providers’ services is likely to come from low-income households, increasing the risk of default and potentially hurting lenders’ creditworthiness, Mr Taiano added.

“Higher inflation and higher interest rates will put pressure on consumption and household solvency. We believe that Klarna could see a higher level of loan losses in this regard, although a short loan book is a mitigating factor,” said Sofie Areskoug, portfolio manager at Spiltan Fonder, which owns Klarna bonds. Klarna’s credits to customers are short-lived.

The company will continue to hold the bonds as Klarna’s capitalization and stable ownership, with investors including SoftBank Group Corp, Sequoia Capital and Permira indicating the likelihood of default is low, Ms Areskoug said.

Klarna relies primarily on customer deposits from conventional bank accounts it offers in Sweden and Germany to fund its operations, although it also has short-term debt such as floating-rate notes and commercial paper.

On a February 2024 floating-rate note, Klarna’s discount margin, a measure of credit spread over benchmark borrowing rates, rose to 272 basis points on Friday, before slipping slightly on Monday.

It’s up 120 basis points this year. In other words, on top of the cost of borrowing increasing everywhere, the additional yield Klarna has to pay to sell more debt is increasing.

Earlier this year, the Swedish company told Bloomberg that 80 to 85 percent of its operations are funded by customer deposits.

This is a stabilizing factor, Mr Taiano said, as deposit rates tend to rise much more slowly than market lending rates. But they, too, are likely to rise to over 1 percent in the coming months until next summer. ‘Buy now, pay later’ leader Klarna cuts staff as prospect of rate hikes drives up borrowing costs

Fry Electronics Team

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