
Airbnb Paying More Than 10% Interest on $1B Financing Announced Monday - JumpCrisscross
https://www.wsj.com/articles/airbnb-paying-more-than-10-interest-on-1-billion-financing-announced-monday-11586297484
======
crazygringo
To those asking how Airbnb could possible need that much money.

Wikipedia says they have 12,736 employees.

$1B works out to $78,518 per employee (before payroll taxes, health insurance,
etc.).

So if you're trying not to lay people off and keep the company afloat while
revenue has plummeted to next-to-nothing... it's not an absurd figure. Or even
if you're laying people off, it's going to take $$$ to find and rehire and
train people when revenue starts coming in again, while continuing to pay the
management team and key employees that will be capable of executing on that,
and keeping the lights on, and paying rent.

Granted almost 13K employees may sound like a lot... but let's say they
operate in 50 countries and have a team of 100 people for each one building up
the business, that's 5,000 employees already. I made those specific numbers
up, but for a global-local company, it's not crazy.

~~~
krtong
I wouldnt offer air bnb a billion for 10%. I dont think they can pay it back.
I hope they can't pay it back. Dublin Ireland saw 67% more housing available
overnight because air bnb home owners needed to offer their homes to long term
stayers since the travel ban. They're a nuisance.

~~~
gms
The problem is the lack of new construction leading to limited supply of
housing, not AirBnB.

~~~
adreamingsoul
I’ve been hearing people say this for years, and it is certainly an easy and
nice line to say. But supply for new housing is not the solution or the issue.

1\. When new housing enters the market it is priced at “fair market value”.
That fair market value is inflated by numerous known and unknown factors. Such
as foreign investors, short-term rentals, etc...

2\. Cost of construction follows the trend and what used to cost X to build is
now 2x, 3x.

3\. Numerous cities have reduced pricing of permits and have even simplified
the planning approval process for homes in an effort to attract imvestors and
developers.

4\. Cost of land is at an all time high. Which again is a factor of the fair
market value. Land owners are wanting to sell to large development projects
that have investors. Developers are bidding against each other to secure land.

Those and more are compounded into a complex relationship that has created a
market that very few people can afford to live in. Is it possible that the
fear of being priced out is driving a lot of these motivations?

~~~
imtringued
According to Berlin 5€ per m² is a fair market value for a 50+ year old
apartment. It's obvious that new construction can never reach a price that is
this absurdly low.

I've never understood this focus on rental pricing. The problem has never been
the price, how can prices constantly go up if nobody can afford them? Well,
the answer is that someone can actually afford the price and for some reason
you are competing with that person that is far more richer than you. Remember
one of the core causes of inflation? Too much money chasing too few goods?
It's not just printing an excessive amount of money that is necessary to cause
inflation. You also need a shortage of goods. You need to have more people
than housing to cause inflation of rental prices. If there are 10 houses but
15 people then you can be assured that landlords will only care about renters
with high incomes and construction companies will focus on building for these
high income people first and only after there is enough housing will they
build housing for the less wealthy residents.

~~~
heavenlyblue
Does this imply I can build a 100-100m2-flat-house for 50000 EUR? How many 0
digits did you miss?

~~~
lonelappde
I think parent meant 5EUR/m^2/month?

------
H8crilA
These are the current going rates for junk bonds. There's nothing surprising
about that. And yes, pretty sure that Airbnb does not deserve investment grade
- I haven't seen their books but those that have and laid money for this loan
clearly think it's a junk bond. Startups generally should not deserve
investment grade, and generally should not raise debt at all if possible. What
are you going to pay the interest with, your negative profits? You're a
growing company, go raise equity.

[https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY](https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY)

BTW, junk bonds can be pretty solid investments. $HYG for the ETFs era
(beware: it has decent energy exposure).

~~~
ta1234567890
> generally shouldn't raise debt, what are you going to pay the interest with,
> your negative profits? You should be raising equity.

And that's the reason why the SBA loans that are part of the stimulus package
are not going to save the small businesses they are supposed to be saving.

Anyways, I can relate. I raised money through convertible notes instead of
equity, because reasons. Then when we didn't do a valued round soon enough (2
years expiration), one of the investors called his note, sued, forced us into
bankruptcy, bought the assets at auction, and is now suing me and my cofounder
personally to repay his note.

So, never doing that again. Debt is not a very good financing tool for small
businesses that are exposed to a lot of risk (almost all of them right now).

~~~
JoshTriplett
> suing me and my cofounder personally to repay his note

On what grounds?

~~~
smallgovt
Investor must be claiming fraud or gross negligence.

~~~
ta1234567890
Investor is suing for breach of contract (the unpaid convertible note), trying
to "pierce the corporate veil" by claiming alter-ego.

In the end we'll "win" this, but that will not save us from having to spend
$50-$150k in lawyers to resolve it (if this goes all the way to trial, it's
about 18-24 months of paying lawyers which cost about $500/hr, at about
10hrs/month).

~~~
gnopgnip
Doesn't the D&O insurance cover this?

~~~
ta1234567890
Unfortunately we didn't have insurance. That's a great tip btw.

------
unlinked_dll
Why does AirBnb need a billion dollars?

I can't find anything suggesting they're spending more than $100mm on their
ongoing litigation, the technology isn't particularly novel or complex, is the
rest just going to compliance or to pay for previous commitments?

Just seems like an absurd amount of money. That's like one year of revenue for
them.

~~~
ardit33
AirBnb is in an existential crisis right now... it might take years before
their market recovers...

It makes absolutely sense to have enough money to weather this storm....

Even firing people costs money... even just keeping their lights on, and
service at bay, (with no new features) costs money....

People that usually comment like the above are either: Young and
inexperienced, or just not don't have real life experience on running a
business. I used to think like that when I was young, but after some years of
experience your view on things changes and becomes more nuanced.

~~~
tootie
I think the question is what are they going to do with $1B though? Like why
would they ever need that much money? I have the same question about a bunch
of unicorns like Lyft and Uber. Their core offering hasn't changed all that
much in years. My only guess is that it's like Hitchhikers Guide to the Galaxy
where they have spend 10% of operations and 90% on running their complaint
department.

~~~
derision
They have 13000 employees. That's a lot of money in salary alone

~~~
fullshark
Well why do they have so many employees?

~~~
whymauri
The number of countries they operate in and the assumption that the next few
years would be growth years. This isn't really rocket-science.

~~~
jonathankoren
It’s not just that. Being flush with cash causes engineering bloat. You start
chasing blue sky trendy ideas (AirBnb was reportedly doing chatbot for a
while, ala Volara.) or chasing more and marginal gains on existing products.
It’s inevitable, when money is cheap.

~~~
xchaotic
So they probably need to let go of those staff and projects rather than
raising money at high interest?

------
adtac
I really hope this money isn't going to be some sort of compensation / relief
plan for lost income for full-time hosts with multiple properties in a city

~~~
mark-ruwt
There is a fund for "Superhosts", but it excludes hosts with than two
properties.

[https://www.airbnb.com/superhostrelief](https://www.airbnb.com/superhostrelief)

------
DevKoala
AirBnB being in trouble is great news for a lot of people in SF. I look
forward to seeing one bedroom apartments back under $500k.

~~~
nemothekid
I feel like you have to be delusional to believe AirBnB is the cause for
outrageous rents in SF.

The housing market _everywhere_ in the bay area is absolutely insane - do you
really believe that AirBNB has an outsized impact on cities like San Mateo?

AirBNB continues to be the housing boogeyman while many people turn a blind
eye to the absolutely sluggish rate of construction in the city.

~~~
DevKoala
It is hard to measure the impact of either, but denying that it had have a
negative effect is delusional.

Only in my circle, I count two individuals who own property exclusively for
the sake of renting it out on AirBnB. I have nothing against landlords, but
facilitating this activity at scale is hurting society since property is being
grabbed for the sole purpose of renting it out; those who have capital
continue amassing property and raising prizes since property to rent out is
the best investment vehicle.

~~~
aaronharnly
OT: you have a nice misnegation there — “denying that it didn’t have...” I
think you meant “denying that it had...”

[https://languagelog.ldc.upenn.edu/nll/?cat=273](https://languagelog.ldc.upenn.edu/nll/?cat=273)

~~~
DevKoala
thank you sir.

------
AYBABTME
This is weird, how does it happen that a company that is essentially a proxy
with 0 skin in the game, require injection of funds like this?

I understand that their income probably dropped, but what is it that they are
they spending so much money on that they can't cut back during the pandemic
and its aftershock?

Real question, I'm not very knowledgeable in that space so would love to
understand what I'm missing.

~~~
tmh79
I mean:

apple is essentially a proxy with zero skin in the game. They don't
manufacture the phones, screens, chips etc...

airlines are proxies, most planes are leased not owned...

Hotels are proxies, most hotel properties are franchises not owned by
corporate...

~~~
cracker_jacks
This is not correct. Apple has an inventory, stores, employees in those
stores, etc. Likewise, for your other examples, these companies have to hold
things on their books like hotel staff, lease payments, building maintenance,
etc regardless of demand.

Airbnb is different. When demand drops, their costs directly drop as well
since they don't pay hosts for stays that did not happen.

~~~
55555
Yes but right now they spend a billion dollars per year on humans doing
things. They could tell all or most of them to go home and not come back, and
then they wouldnt. But it seems they are placing big bet on this being highly
temporary.

The odd thing is that they dont seem to get rid of anyone at all. Most
companies use COVID as an excuse for a round of overdue layoffs

~~~
cracker_jacks
I agree this is odd. Given their business, what Airbnb needs 12000+ employees
for is beyond me.

------
hogFeast
I am not really sure who got the best of this deal.

Definitely, this looks like an attractive investment. Limited downside, nice
rate, and some nice optionality with the warrants.

But...this is AirBnb. At the very least, they should have got either an
improved strike or more shares. The warrants just seem to say something very
different to the bonds.

At best, this is a B rated security and maybe CCC.

And they are really going to have a chainsaw to costs here. I would expect at
least 50% of the workforce and probably closer to 75% given the fat that some
of these SV companies have been rolling with. Definitely funding that screams:
we are near bankruptcy.

------
lefstathiou
Meanwhile Craigslist will live on...

~~~
rchaud
Yeah, because Craigslist actually facilitated the transaction between buyer
and seller. They were a pure example of a "dumb pipe", designed to do just one
thing.

I booked plenty of spare rooms and apartments on CL back in the 2000s. Send an
email, chat briefly on the phone, done deal. No muss, no fuss.

Airbnb wants to control every aspect of the transaction, from payment, to even
simply communicating with the host; everything has to go through their
channels.

Beyond that, they've tried to become a hotel company without offering
protections for hosts, or following any of the regulations that hotels do,
until events force them to act otherwise (wild parties resulting in damages,
the recent shootings at a US and then at a Toronto location).

Unsurprisingly, they are now stonewalling both hosts and guests on
cancellation refunds. Do a search for "bchesky" on Twitter; there are
thousands of tweets from people who are out significant amounts of money.

------
jennyyang
ServiceNow currently has debt that is paying 0% interest. I think a lot of
companies are in the same position. I don't think Apple's bonds are paying
very much interest at all either. If Airbnb is selling junk bonds at 10%, that
is catastrophically high. The World Bank's Pandemic Bonds were paying about
13% interest, so there's a high amount of risk built into that debt. And I
wonder how many warrants were issued because that has a real dilution
potential for other investors and employees.

------
bogomipz
>"Airbnb Inc. agreed to pay its new investors interest at a rate of more than
10% and to strengthen its leadership, in return for the $1 billion in
additional funding announced Monday, according to people familiar with the
matter."

Can anyone shed some like on exactly what is is meant by AirBnB agreeing to
"strengthen its leadership"? Does this mean make changes to its' board?

~~~
enra
The board has been growing in preparation for the IPO. I think this means
adding seasoned C-level roles. There is still no CFO, COO left and there
hasn’t been a CMO in years. Operational C-level is not that seasoned and has
gaps.

------
Animats
Wow! Who pays 10% for money in bulk today? Companies in desperate trouble.

------
digitaltrees
ooohff. That hurts but still cheaper than equity, especially a down round.

~~~
nemo44x
It is essentially a down round if they survive. The loan has warrants that can
be converted to shares if their valuation goes above 18b which is half their
previous valuation.

In essence they sold options on their equity that if they fail to reach the
strike price they are stuck paying back a lot of debt.

An absolutely awful set of terms for them and more like a loan shark than a
well planned financing motion.

They are clearly in an absolute existential crisis and ready to take what they
can get. Management is at fault here for allowing this type of rail risk be
uninsured somehow with more previous financing.

~~~
onlyrealcuzzo
I thought AirBNB was recently claiming to have more than $1Bn in Cash on Hand.
This seems like an extreme measure that wouldn't make sense if they actually
did have that much cash -- right??

~~~
babesh
It is probably because travel will take a lot longer to come back than most of
us expect. This is because travel is probably one of the prime ways covid-19
can start spreading again and governments will be very leery of any activity
that will restart the spread.

I bet travel will be restricted till there is a vaccine yet no vaccine is in
sight. Perhaps in the meantime you will be forced to take a covid-19 test
before boarding and when you come back?

So you should expect AirBnB to lose virtually all its business till major
tourist centers and sources of tourism have stabilized. And you should expect
that it won't come close to recovering till there is a vaccine.

Then you have to add on that travel is discretionary and given the economic
shock, travel will be the first to fall and last to recover.

So months to recovering some and then no full recovery till a vaccine is found
(> 6 months to year(s)). One good proxy is the Olympics. It's been postponed
to July of next year.

I bet their burn rate with ~12000 employees is >>1B per year.

~~~
avalys
I disagree with your thesis. When coronavirus was extant only in specific
geographic hotspots, limiting travel makes sense. However, when it's present
across the entire world at a low level - which seems quite likely to occur
within the next month or two - then people traveling between regions is not
going to increase the spread that much.

Right now it makes sense to tell people to stay in their homes. Once you lift
that restriction, whether they're leaving their home to travel 20 miles or
1,000 miles is not that relevant.

Travel will be limited only as much as overall economic activity is limited,
and there's no way we can maintain the current level of restrictions for the
~18 months it will take for a vaccine to become available.

~~~
jddj
If the countries are trying to do contact tracing and isolated quarantines
where flare-ups are found, it absolutely matters.

This is what people are talking about at the moment when they mention easing
lockdown restrictions.

Imagine a single government trying to get the word out to everyone who may
have come into close contact with someone who flies from London to Berlin on a
Friday, jumps on a train at the airport, parties for 48 hours, flies home on
the Monday and feels ill/gets tested the following Wednesday. Then replace
Berlin with "Liverpool" and see how that improves things.

------
parthdesai
Being partly responsible for increasing rent in the city, blatantly ignoring
city's bylaws and zoning laws, having to deal with some Airbnb neighbors from
hell while Airbnb preached the Silicon valley cool aid of we are changing the
world and actually helping people, I would be lying if I said that I'm not a
tiny bit happy to see this.

Already ton's of apartment have started popping for long term lease here in
TO.

~~~
toomuchtodo
The cool part is all of these units that were AirBNB units owners are
struggling with might get locked into year long leases to stem the bleeding,
keeping them out of short term rental inventory for a year. This might cause a
material decline in YoY revenue for AirBNB over the next year, depending on
how long lockdown lasts, which is unfortunate timing considering their new
financing arrangement.

~~~
nemo44x
In a lot of markets it’s going to be hard for land lords to kick these tenants
out too. Many speculators are probably getting panicked here and they’ll rent
long term and not easily be able to go back into short term any time soon due
to renters rights in certain places.

------
jontro
[http://archive.is/v7GUC](http://archive.is/v7GUC)

------
calvinbhai
Trying to wrap my head around this.

Is this different from Convertible Debt?

Also, why raise at 10% interest when interest rates are so low?

~~~
safog
Corporate bond yields spiked due to business risks posed by Covid19. B rated
bonds went from ~5% to >10.65%

[https://ycharts.com/indicators/us_high_yield_b_effective_yie...](https://ycharts.com/indicators/us_high_yield_b_effective_yield)

~~~
knes
a preferred Payment In Kind (PIK) is not the same as a high yield bond.

PIK is closer to equity so a 10% interest is pretty high

------
matchbok
Airbnb is exactly what is wrong with tech, and this is more reason why. There
is no reason why the company needs that much cash.

Also, the company is actively hollowing out our cities so they can make a
quick buck off of the back of low-to-middle income renters.

------
someonehere
Gut feeling says Expedia will buy them when this all over.

~~~
xyzzyz
Or they will buy Expedia. Who knows which one survives.

------
yshvrdhn
if only they can get into quarantining as a service.

~~~
rchaud
They could, if they actually owned leased their own properties like hotels do,
instead of shifting the risk on to homeowners and taking their cut.

But that wouldn't make it a 'billion dollar company'.

------
LatteLazy
Where can I get a piece of that?

------
xwdv
I hope they just shut down and go out of business. I’ve really come to hate
Airbnb and their shady practices, and I’d love to see them replaced by
something better.

------
pbreit
The reporting is a little off.

It's says an $18b valuation is "a drop of almost half" from $31b. OK, almost.

Then it says all of the $1b is debt which would not suggest a new valuation.

~~~
tonyhb
"The investors will also get warrants that can be converted into shares with a
valuation for the company of $18 billion, a drop of almost half since Airbnb’s
last fundraising in 2017, the people said."

This indicates they'll get twice as many shares for the money as previous
investors. Hence a ~50% drop in valuation.

