The Commonwealth Bank (CBA) is facing the prospect of a billion dollar plus impairment of the book value of its 5.5% stake in the Buy Now Pay Later (BNPL) giant Klarna following news the Swedish-based group is finding it harder to raise new capital at prices sharply lower than a year ago.
The CBA will have to reveal a new valuation for its stake either in its August full year results or in an update before reporting.
Media and analyst reports from Europe at the weekend said Klarna is looking for new money that implies a value of $US15 to $US20 billion compared to the peak value of $US46 billion a year ago.
The Wall Street Journal reported that Klarna was now looking for new capital at a price that would value it at around $US15 billion.
The Financial Times reported that Klarna had failed to raise money at a $US20 billion value, meaning the CBA did not inject new money into the BNPL giant and raising questions about its balance sheet valuation for the 5.5% stake.
The FT also reported fund raising attempts earlier this year st higher prices had also failed.
Klarna’s struggles to raise new money highlights the growing crisis of the “buy now, pay later” business model that has already sent shares in listed operators sharply lower in the US and Australia.
The ending of pandemic lockdowns has seen consumers move back to in store buying and more use of debit cards, according Reserve Bank data.
Bad debts have also risen for BNPL companies as they have been forced to recognise them.
Shares in Afterpay’s US owner Block are down 63% year to date while shares in Affirm (Walmart and Amazon are its biggest clients) are down 80% or more, as are local operators here such as Zip and Sezzle.
The CBA had valued its Klarna stake at $2.7 billion in its 2030-32 annual accounts, up from just over $500 million a year earlier.
The CBA moved to a stake around 5.5% in January 2021 when it paid $200 million to lift its 1.7% stake by around 3.7% stake.
That saw the Bank boost the book value to $2.7 billion in the annual accounts released in August, 2021.
A year later and Klarna’s value has fallen sharply, as evidenced by the struggle it is having to get new money at lower price levels that look like being 50% to 70% lower than the 2021 valuation.
That should coerce the CBA into updating the ASX as to what its new book value is. Any impairment will be a non-cash write down.
The CBA, like all other financials, is facing rising pressures of its own from higher interest rates and inflation, a possibly slowing economy and potentially more bad debts.
Pumping more money into Klarna when the CBA will need as much capital as can hold onto, should rule out any generosity in any new raising.
In May, the Stockholm-based company cut 10 per cent of its workforce of more than 7,000 people, blaming the Russian invasion as well as rising inflation, market volatility and a shift in consumer behaviour.
Klarna is owned by a large group of investors including SoftBank, Sequoia Capital, Silver Lake, Bestseller Group, Dragoneer, Permira, Visa, Commonwealth Bank, Ant Group and Atomico.
Apple’s decision to enter the buy now, pay later sector earlier this month, has added further pressure on Klarna and its rivals.
The threat of new regulation in Europe, the UK, the US and Australia is an added worry and potentially, means higher costs.