(Bloomberg) – By all accounts — including that provided by Elon Musk — Twitter has more than enough money to make its initial interest payments, which are expected to total about $300 million.
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But with the payment date fast approaching, there are still some concerns about what the impulsive billionaire might do to ease the social media company’s $12.5 billion in debt.
Yes, Musk said in a Twitter Spaces conversation in late December that the company has about $1 billion in cash on its balance sheet. But he’s also openly floated the idea of bankruptcy, citing a “massive drop in revenue” as some advertisers fled the platform and cut staff since it completed its $44 billion leveraged buyout in late October.
The debt is owned by a group of seven banks led by Morgan Stanley. The Musk acquisition drama and volatile markets have left them burdened with loans that they would normally have given to investors.
Now, after losing about $4 billion on paper supporting Musk’s Twitter bid, market observers see little reason for banks to participate in unexpected maneuvers near the interest payment deadline, around January 27.
Eventually, in most bankruptcies, equity is wiped out — and lenders eventually take control.
“The stakes are too high for Musk and his co-investors,” said Jordan Chalfin, a senior analyst at credit research firm CreditSights. “Twitter will make its short-term interest payments, come hell or high water, and give the business time to turn around.”
Morgan Stanley and Musk officials did not respond to requests for comment.
Few reasons
While anything is possible with Musk, he doesn’t have many reasons to skip the first interest payment. Longer term is a bigger question: In the Twitter Spaces conversation, he said the company is poised to lose $3 billion in 2023.
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“That’s why I’ve spent the last five weeks cutting costs like crazy,” he said.
But if Twitter doesn’t pay its interest, it could trigger a near-term default that would allow banks to force the company into Chapter 11 bankruptcy. Some debts allow a 30-day grace period, but it’s unclear if that applies to the Twitter loans.
Regardless, the fallout for 51-year-old Musk, who owns an estimated 79% of the company, would be immediate and dire.
While Twitter is on the hook for the debt and not Musk personally, he has raised more than $20 billion for his stake in the company. According to the Bloomberg Billionaires Index, he’s now worth an estimated $11.6 billion, a sizeable chunk of his $137.4 billion fortune.
“If you’re a Twitter lender and Elon Musk threatens not to pay the coupon, you go to the standard playbook, which is, ‘Okay, see you in bankruptcy,'” said Philip Brendel, a distressed debt analyst at Bloomberg Intelligence.
“In terms of who has more to lose, it’s certainly Elon Musk,” Brendel said. “Whether he cares, if he loses that or not, that’s a completely different question. He certainly behaves differently than what normal people would do in such situations.”
Broader Negotiations
Musk is known for being unpredictable and could use the first payment in broader negotiations with Twitter’s lenders. He and the banks have been trying to find solutions to the interest burden, which has become more punishable as interest rates have risen than when he offered it in April.
Late last year, bankers considered replacing some of the high-yield debt with new margin loans backed by shares in Tesla Inc., which he would be personally responsible for repaying, one of several options being considered at the time.
When Musk sold $3.6 billion worth of Tesla stock last month, some analysts speculated that he could use the money to buy Twitter debt from the banks, which would put him in a better position in a bankruptcy filing. But it’s not clear if Morgan Stanley and others would willingly sell to him at sell-off prices.
There’s also a possibility that Musk may decide to ditch Twitter and refocus on his other companies, such as Tesla and SpaceX.
Of course, if Musk walked away, he would not only harm himself, but also the other financiers who joined his investment, such as the sovereign wealth fund Qatar Investment Authority, which contributed $375 million.
“We are working with management, with Elon, on the plan that he has for the company and we believe in it and we trust his leadership as it comes to transforming the company,” said Mansoor Al Mahmoud, Chief Executive Officer of QIA an interview by Bloomberg TV on Monday in Davos.
QIA was among a group of approximately 20 investors who contributed to the equity commitment, according to a filing in May. Saudi Prince Alwaleed bin Talal has also transferred more than 30 million shares worth approximately $1.9 billion using the purchase price of $54.20. Jack Dorsey turned his post too.
debt details
Twitter has three major debts with interest due: $6.5 billion to be sold to leveraged-loan investors and $6 billion in bridge loans split equally between secured and unsecured tranches , which the banks wanted to sell form of junk bonds.
All debt appears to have quarterly interest payments, according to an April debt commitment letter and people familiar with the matter who asked not to be named to discuss a private transaction.
Interest due in the coming weeks is expected to be around $300 million, according to calculations by Bloomberg and market participants not involved in the Twitter deal. This is based on the debt commitment and a maximum interest rate of 11.75% on the unsecured tranche.
That number could be higher depending on whether the banks increased the interest rate on the $6.5 billion tranche with their “flex” provision upon closing the deal, and whether Twitter offered the one-, three-, or six-month version Benchmark Secured uses overnight financing rate. (If the company had opted for the one-month rate, it could have paid smaller amounts of interest each month rather than a larger sum quarterly.)
Twitter also has a $500 million revolving credit facility that allows the company to borrow, repay, and reborrow over the life of the loan. If Twitter resorted to it, the interest expense would increase significantly. Twitter already pays a 0.5% annual fee to access the funds.
Meanwhile, Twitter has been looking for creative ways to reduce spending. In some cases, it has halted rent payments on some of its office space, prompting employees to try to renegotiate contracts with third-party contractors. This week, Twitter auctioned off hundreds of pieces of office furniture.
Meanwhile, Musk regularly tweets 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 hiked rates instead of cutting them,” he said Jan. 13. “The higher the interest rates, the harder the case.”
–Assisted by Jeannine Amodeo, Lisa Lee and Kurt Wagner.
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