Spotify’s Layoffs Show There’s a Debt-Market Time Bomb Awaiting Many Companies

Spotify is wrapping up 2023 by cutting 1,500 jobs, or around 17% of its total workforce.

"Economic growth has slowed dramatically and capital has become more expensive," CEO Daniel Ek said a memo sent to employees Monday. "Spotify is not an exception to these realities."

Ek's reference to a downturn in growth reflects the corporate world's well-established fears that there'll be a recession in 2024, even though the US's Gross Domestic Product (GDP) has defied Wall Street's gloomy forecasts this year by expanding at a faster-than-expected rate.

His remarks on rising capital costs highlight a different issue – and should serve as a reminder of a ticking debt-market time bomb that could wreak havoc in the corporate sector over the coming years.

Spotify's debt

Later on in his letter to employees, Ek discussed the debt Spotify took on in February 2021. The streaming giant raised $1.3 billion worth of capital by offering exchangeable notes that will come due in 2026.

"In 2020 and 2021, we took advantage of the opportunity presented by lower-cost capital and invested significantly in team expansion, content enhancement, marketing, and new verticals," he said. "These investments generally worked, contributing to Spotify's increased output and the platform's robust growth this past year."

"However, we now find ourselves in a very different environment," Ek added. "And despite our efforts to reduce costs this past year, our cost structure for where we need to be is still too big."

In other words, when Spotify raised that debt, it was taking advantage of historically low borrowing costs, with the Federal Reserve having cut benchmark interest rates to near-zero in a bid to prop up the US economy during the COVID-19 pandemic.

Nearly three years later, the company is facing different circumstances, with the Fed having hiked rates to around 5.5% in a bid to kill off red-hot inflation.

So, one factor driving Spotify's layoffs is its need to cut costs as part of an effort to raise $1.3 billion in cash to pay off its creditors. If it can't find that money, it'll be much more expensive for it to refinance.

Bankruptcies and defaults

Spotify isn't the only company that looks like it could be burnt by the Fed's tightening campaign.

As many as 561 US companies had filed for bankruptcy in 2023 as of the end of October, according to data from S&P Global. The only year on record where more companies failed over the first 10 months was 2020, when the global lockdown sparked a stock-market crash and dragged the world economy into a recession.

Meanwhile, 127 companies had failed to repay their debts as of the end of October, per a separate report by S&P Global, which is 13% higher than the five-year average.

There's no suggestion yet that Spotify needs to worry about bankruptcy or default. Its shares spiked around 7% Monday, in a sign that Wall Street approved of Ek's aggressive layoffs.

But the streaming giant's latest move should serve as a reminder that the Fed's aggressive interest-rate hikes are likely to leave a big slice of corporate America fretting about debt.