Musk stands to lose even more if he tries to pass on the Twitter debt


(Bloomberg) — By all accounts — including Elon Musk’s — Twitter has enough cash to make its first interest payments, expected to be about $300 million.

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But with the due date fast approaching, there are some concerns about what the impulsive billionaire’s social media company can do to ease its $12.5 billion debt burden.

Yes, Musk said in a Twitter Spaces chat in late December that the company has about $1 billion in cash on its balance sheet. But it has publicly floated the idea of ​​bankruptcy, citing a “huge drop” in revenue as some advertisers fled the platform and laid off staff after it closed its $44 billion leveraged buyout in late October.

A group of seven banks led by Morgan Stanley owns the debt. The drama surrounding Musk’s acquisition and volatile markets has put them in a position where they would normally be burdened with loans to investors.

Now, after losing nearly $4 billion on paper to back Musk’s Twitter bid, market watchers see little reason for banks to make any unexpected maneuvers near the January 27 interest payment date.

After all, in most bankruptcies, equity is wiped out and creditors eventually take control.

“There is a lot at stake for Musk and his investors,” said Jordan Chalfin, senior analyst at credit research firm CreditSights. “Twitter will make near-term interest payments, come hell or high water, and give the business time to turn around.”

Representatives for Morgan Stanley and Musk did not respond to requests for comment.

Several reasons

While anything is possible with Musk, he doesn’t have much reason to skip the first interest payment. The long term is a bigger question: In a Twitter Spaces chat, he said the company is on pace to lose $3 billion in 2023.

“That’s why I’ve spent the last five weeks cutting costs like crazy,” he said.

But in the near term, if Twitter doesn’t pay its interest, it could trigger a default with banks that would force the company to file for Chapter 11 bankruptcy. Some loans allow a 30-day grace period, but it’s unclear if this is the case for Twitter loans.

Regardless, the consequences for Musk, 51, who owns about 79% of the company, will be immediate and severe.

While Twitter is on the hook for debt, not Musk himself, he put up more than $20 billion for his stake in the company. According to the Bloomberg Billionaires Index, it is currently worth about $11.6 billion, a significant chunk of his $137.4 billion fortune.

“If you’re a creditor to Twitter and Elon Musk threatens to default on a coupon, go with the standard playbook, which is, ‘OK, I’ll see you in bankruptcy,'” said Philip Brendel, debt squeezer. Bloomberg Intelligence analyst.

“As for who has the most to lose, it’s definitely Elon Musk,” Brendel said. “Whether he cares about losing it or not, that’s a different question. He certainly behaves differently than normal people would in these situations.”

Broader negotiations

Musk is known for being unpredictable and could use the first payment in broader negotiations with Twitter’s creditors. He and the banks are scrambling to find solutions to a more punishing interest burden than when he made his proposal in April as interest rates rose.

Late last year, bankers sold some of the high-interest debt to Tesla Inc. They were considering replacing it with new margin loans backed by their shares, which they would be personally responsible for repaying, one of several options being considered at the time.

As Musk sold $3.6 billion of Tesla stock last month, some analysts thought he could use the money to buy Twitter debt from banks, putting him in a better position in bankruptcy proceedings. But it’s unclear whether Morgan Stanley and others will be willing to sell to him at bargain prices.

There’s also a chance Musk could give up Twitter and refocus on his other companies, including Tesla and SpaceX.

Of course, if Musk were to leave, he would hurt not only himself, but also other shareholders who joined his investment, such as the sovereign wealth fund Qatar Investment Authority, which contributed $375 million.

QIA Chief Executive Officer Mansoor Al Mahmoud said, “We are in touch with management, with Elon in terms of the plan he has for the company and we believe in that and we trust his leadership in terms of turning around the company.” Bloomberg TV interview in Davos on Monday.

QIA was part of a group of about 20 investors that contributed to the equity commitment, according to filings in May. Saudi Prince Alwaleed bin Talal also floated more than 30 million shares, worth about $1.9 billion, using a purchase price of $54.20. Jack Dorsey also exceeded his share.

Debt Details

Twitter has three major debts: $6.5 billion to be sold to investors, with interest to be paid, and a $6 billion bridge loan split equally between the secured and unsecured tranches that banks plan to sell. form of junk bonds.

All of the debt appears to be quarterly interest payments, according to the April debt commitment letter and people familiar with the matter, who spoke on condition of anonymity to discuss the private transaction.

The interest to be paid in the coming weeks is expected to be about $300 million, according to Bloomberg estimates and market participants not involved in the Twitter deal. This is based on the debenture letter and a maximum interest rate of 11.75% on the unsecured tranche.

That figure could be higher, depending on whether banks use “flexibility” provisions to increase the interest rate on the $6.5 billion tranche when the deal closes, and whether Twitter uses a one-, three- or six-month version of the Secured benchmark. Overnight Financing Interest Rate. (If the company chose a monthly rate, it could pay smaller interest amounts each month rather than a larger amount quarterly.)

Twitter also has a $500 million revolving credit facility, which allows the company to borrow, pay it back, and borrow again over the life of the loan. If Twitter takes advantage of this, interest expenses will increase significantly. Twitter already pays an annual fee of 0.5% to access funds.

Meanwhile, Twitter is looking for creative ways to cut costs. In some cases, it stopped paying rent for some office space and also asked employees to try to renegotiate deals with third-party vendors. This week, Twitter auctioned off hundreds of pieces of office furniture.

All the while, Musk has been tweeting from time to time about the Federal Reserve’s decision to raise interest rates at the fastest rate in a generation.

“I wonder what would have happened in 2009 if the Fed had raised rates instead of cutting them,” he said on January 13.

–With assistance from Jeannine Amodeo, Lisa Lee and Kurt Wagner.

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