When Spotfify took on $1 billion in debt under difficult terms, we questioned the long term effect on the music streamer's financial health. Now, Spotify is hoping to go public without an IPO, but last year's debt deal could put the damper on those plans.
Spotify pays 5% annual interest on the debt, adding 1% every six months for a total of up to 10%. Investors can convert their debt to equity at a 20% discount of Spotify’s IPO share price; and if there is no IPO within a year, the discount at which they can eventually buy stock increases 2.5% every extra six months. Additionally, these investors can sell their shares just 90 days after the IPO, well before the 180 day lockup for Spotify’s other investors and employees.
The problem is that going public without an IPO means that Spotify is not raising capital from new investors and therefore does not satisfy the terms of Spotify's deal to stop a 2.5% jump in debt interest every six months. Another option, according to sources is for Spotify to just pay the higher interest rate and pay off the debt when the bonds mature.