Snap Issues US$1 Billion in Convertible Debt

On Tuesday (August 6), Snap (NYSE:SNAP), parent company of mobile app SnapChat, announced that it will be issuing US$1 billion in convertible debt.

Scheduled to mature on August 1, 2026, the debt is planned to be used for company operations, including working capital, AR developments and acquisitions. The convertible senior notes will offer a 0.75 percent interest rate paid semiannually.

At maturity, notes will be paid back in shares, cash or a combination of the two. Debt-holders will be able to convert their notes beginning on April 30, 2026.

“We will continue to focus on developing our content, gaming, and augmented reality platforms to enhance the Snapchat experience for our community,” Kevin Spiegel, CEO of Snap, told Reuters.

With financing anticipated to close by Friday (August 9), Spiegel added that investor demand for convertible notes remains high, while current interest rates create a favorable environment for issuing debt.

As Snap issues its first series of long-term debt, it comes as the company experiences renewed growth and positive momentum. Since its initial public offering (IPO) in March 2017, Snap has witnessed turbulent share price movements, rarely surpassing its original listing price of US$17.

After reporting lagging user growth, its shares dropped over 60 percent in 2018. This year, however, Snap took a new approach, adding mobile games and augmented reality features to its app. These additions have helped boost its share price to a 174 percent increase year-to-date. Snap shares reached US$16.76 at market close on Thursday (August 8).

The debt financing comes following the release of its Q2 2019 earnings report in July. Snap highlighted that the last quarter saw the launch of Snap Games, which included seven new mobile games for users. The addition of its Lens Studio AR features led to 500,000 new lenses being made by the end of the quarter. Its lens features apply neural networks to alter a user’s image.

Overall, Snap reported that it had 203 million daily active users in the quarter, rising at an 8 percent year-over-year uptick. Revenue figures jumped to US$388 million, rising by almost 50 percent during the same time period. Despite a 50 percent year-over-year improvement in earnings, adjusted EBITDA stood at negative US$78.7 million for the quarter.

Snap’s debt issuance comes at an interesting time. With the economy in its 11th year of expansion, corporate debt levels continue to rise. Lower interest rates and a strong economy tend to promote corporate lending because they tend to offer higher interest rates than traditionally safer assets, such as government bonds.

However, rising corporate debt can also pose a number of risks. If the economy enters a downturn, it can increase the rate of default, or in the worst case, bankruptcy.

Snap joins a number of companies that have issued large swaths of corporate debt. In April, Netflix (NAQ:NFLX) issued US$2 billion in debt to fund acquisitions and content spending. As of July, Netflix has a total of US$12.6 billion in long-term debt. Ride-hailing giant Uber issued US$2 billion in corporate bonds in 2018 prior to its IPO. The loss-making company has a total of US$6.9 million in long-term debt as of the first quarter 2019.

In July, Snap’s shares rose above its US$17 original listing price to US$17.60 for the first time since launching. Since Tuesday’s announcement, Snap shares have climbed just over 3.5 percent.

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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.