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Will Caiger-Smith

This week, Netflix became the latest high-profile leveraged credit to announce mass layoffs, following similar announcements from Carvana, Uber and newly minted term loan borrower Peloton.

Robinhood cut more than 300 jobs last month (it is yet to tap the levfin market, but sources close to the company told 9fin it has been considering doing so for some time).

Fellow fintech Coinbase, which made its HY debut last year, has not announced mass layoffs, but on Tuesday announced it would slow its hiring plans.

The crypto exchange was planning to triple its workforce this year, but is now scaling back those ambitions (a Google search for “Coinbase careers” still shows more than 100 open positions, while tech-centric job board Builtin lists about 470).

Sources within the crypto industry inform 9fin that while Coinbase is pulling back publicly, many other firms have quietly instituted full hiring freezes or are scaling back their headcount. Some are actively laying employees off, while others are just letting attrition do its work.

This partly reflects the recent selloff in crypto, of course — an almighty repricing that has helped push Coinbase’s bonds (and those of Bitcoin whale MicroStrategy) to stressed or distressed levels.

But for Coinbase, perhaps the most pertinent factor behind the hiring slowdown is a seriously disappointing set of first quarter earnings, in which the company revealed a big decline in active users and forecast another decline in the second quarter.

This narrative is eerily reminiscent of the one that sent Netflix’s stock and debt tanking last month. The big column of letters in our chart below is the spike in news stories like this one after Netflix revealed a sharp fall in subscribers, and forecast another drop in the second quarter.

Cryptocurrency and TV content are different things, but both these situations show how fast the fortunes of publicly traded, high-profile leveraged credits can change. In February, Netflix was right on the cusp of investment grade; now, that move might be a few quarters away.

It’s similar story at Uber, Carvana, Peloton and Robinhood and countless other tech companies (check out this layoff tracker): we overshot on growth, hired too many people, and now we’re pulling back.

Plenty will argue that it’s unfair to group these businesses together and suggest they represent some kind of trend. But hear us out!

Whether it’s genuine or just marketing bluster, these companies all have some kind of tech angle to them. From a credit perspective, the important uniting factors are large equity cushions and a tendency to burn large amounts of cash.

Whatever you call them (tech? tech-enabled? tech-adjacent...?) they are now hitting a wall. Their equity cushions are deflating, and they’re under pressure to achieve profitability. Mass layoffs (or at least pulling back on hiring) are just the beginning of that battle.

On paper, this is not a good moment for these kinds of companies to issue debt. The average credit investor is much less willing to fund a cash burn than they were this time last year, and LTVs are being obliterated by falling stonks.

Except...apparently it is? Peloton’s bankers literally just syndicated a $750m term loan that was more than two times oversubscribed! And less than a month ago, Carvana issued $3.275bn of bonds (it’s worth $2.78bn based on today’s pricing, but let’s ignore that for now).

These deals are a different breed, however — a far cry from the 2017/2018 heyday of the Debt Market Disruptors Club when WeWork, Uber and Carvana first hit the market.

For one, Peloton and Carvana’s deals were not really broadly syndicated. Without large anchor orders, it’s doubtful they would have succeeded.

Apollo got most of the attention for rescuing Carvana’s deal, but Pimco and Franklin also played a big role. Peloton also got plenty of help, but it had more of a club deal angle: as eagle-eyed 9fin readers will know, the loan was basically pre-placed before the official syndication.

Another major difference is that there is a much greater possibility of these deals ending up as a loan-to-own play.

A turnaround at Peloton is far from guaranteed, and the history of faddy fitness businesses is far from encouraging. Carvana, meanwhile, is confronting a bear market in used cars and its bonds are mostly distressed. Both companies are sitting on huge piles of depreciating inventory.

So: what does this mean for other members of this tech-adjacent cohort that find themselves in need of capital?

Robinhood was always a notable absentee from the levfin universe. As we mentioned earlier, sources told 9fin it has considered issuing debt to diversify its funding sources, but that the window has probably closed for now (the company did not respond to a request for comment).

This seems logical. Any issuers that do decide to go to high yield bond and/or leveraged loan investors for capital will likely encounter a lot more skepticism after the past few weeks.

Sure, a friendly private credit fund might offer to write a big check. Banks might underwrite a loan and then syndicate it to a small club, like they did with Peloton. But those lenders might demand steeper pricing than the broadly syndicated markets, and clubbier lender groups could lead to faster creditor takeovers if things go south.

Perhaps it’s too early to say the syndicated markets are closed to these companies, but it certainly feels like they should be. The YOLO/FOMO factor is disappearing fast.

In the pre-pandemic boom days, many credit investors defended their decision to back WeWork and Uber by pointing to the rising LTV. It didn’t matter if there was no free cash flow to service debt — the issuer would just hit up Softbank or some other giant VC fund and raise more money.

These days, that thesis seems almost quaint. We’re now entering a period of considerable uncertainty: geopolitics is being reshaped in unpredictable ways, and consumer behavior is changing under powerful market forces that many of us haven’t experienced before.

The challenge for high-growth, cash-burning companies was always going to be achieving profitability. That’s even harder nowadays, with increased competition and rising funding costs to contend with.

In this environment, equity raises are moving in the wrong direction (see Klarna’s latest round). Given the current state of credit markets, the alternative — the so-called “debt IPO” — doesn’t look as viable as it once did.

This might be a good thing! Maybe the meme-credit days are over, and the credit market is rediscovering its principles.

But it’s been a long time coming, and investors who got distracted from credit fundamentals by a high-growth equity story might be in line for a reckoning.

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