Looming Twitter curiosity cost leaves Elon Musk with unpalatable choices

The invoice for Elon Musk’s buy of Twitter is coming due, with the billionaire dealing with unpalatable choices on the corporate’s monumental debt pile, starting from chapter proceedings to a different expensive sale of Tesla shares.

Three individuals near the entrepreneur’s buyout of Twitter stated the primary instalment of curiosity funds associated to $13bn of debt he used to fund the takeover might be due as quickly as the tip of January. That debt means the corporate should pay about $1.5bn in annual curiosity funds.

The Tesla and SpaceX chief financed his $44bn deal to take Twitter personal in October by securing the massive debt from a syndicate of banks led by Morgan Stanley, Financial institution of America, Barclays and Mitsubishi. The $13bn debt is held by Twitter at a company stage, with no private assure by Musk.

For the reason that takeover, Musk has raced to chop prices, corresponding to firing half the corporate’s workers, whereas looking for new income streams, corresponding to launching its Twitter Blue subscription service.

The corporate’s dire funds — it made a lack of $221mn in 2021 earlier than the acquisition and Musk has stated revenues have declined since — have led the brand new proprietor to usually elevate the prospect that the corporate might crash into chapter 11.

How Musk offers with the looming curiosity cost is a vital take a look at of his management of Twitter, which has up to now been marked by chaotic administration that has alienated its company advertisers. 

“This firm is such as you’re in a aircraft that’s headed in the direction of the bottom at excessive velocity with the engines on fireplace and the controls don’t work,” Musk stated final month.

If Twitter didn’t make its first curiosity cost, it will be a part of a small however infamous membership of corporations dubbed “NCAA” by debt merchants — brief for “no coupon in any respect” — that features US automotive rental firm Hertz and German funds group Wirecard.

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Such a default on its debt would most likely end in Twitter’s administration submitting for chapter, at which level the US courts would start an costly and bureaucratic debt restructuring course of.

Musk might keep away from this destiny by settling the curiosity from Twitter’s dwindling money reserves or promoting extra fairness within the firm to fund the funds — each painful choices. The enterprise has a money place of about $1bn, Musk has stated. He has additionally warned that its web money outflow might be about $6bn subsequent 12 months with out extra cost-saving measures.

Rising rates of interest imply the debt will turn out to be increasingly costly, concurrently Twitter’s enterprise worth has been broken.

Bankers and consultants observing the deal stated Musk was unlikely to file for chapter, which might threat him shedding management of the enterprise.

As an alternative, his choices embrace reducing a brand new cope with lenders, corresponding to a debt-for-equity alternate at a reduction to the debt’s face worth, or discovering other ways to fund its curiosity funds as he performs for time to show across the enterprise. “It’s extra doubtless [Musk] would ask Twitter’s collectors for a forbearance and try to work one thing out,” stated one restructuring banker.

Musk’s private fairness funding in Twitter of about $26bn can be successfully worn out within the occasion of a chapter, alongside different fairness stakeholders corresponding to Sequoia Capital, Oracle co-founder Larry Ellison and Saudi prince Alwaleed bin Talal. Within the queue for compensation, their investments can be behind the banks which have loans secured towards Twitter’s property, in addition to the corporate’s unsecured lenders and commerce collectors.

“I presume [Twitter] just isn’t going to default on the debt as it’s fairly lower and dry what that results in,” stated a banker whose financial institution holds a big chunk of the debt. He stated discussions between the banks and Twitter’s administration over the debt repayments had been ongoing.

Nevertheless, bankers say Musk might try to enhance his place by buying Twitter’s debt cheaply, throughout or outdoors of a chapter, and later changing it to fairness if he turned the positioning right into a worthwhile firm sooner or later — though this could require a willingness by the banks to promote the debt to Musk at a reduction, and means he must write one more cheque for Twitter if he wished to remain in management.

Unfavorable sentiment round the way forward for Twitter since Musk took it over in addition to greater rates of interest have stymied the banks’ skill to dump the debt to buyers. The banks’ massive stability sheet publicity might put strain on them to promote the debt to Musk, both within the occasion of a chapter or out of courtroom.

“Musk can be final in line [for repayment], however clearly he wields a number of affect,” stated one restructuring banker with information of the Twitter deal, citing the lenders’ need to remain on good phrases with Musk. “The specter of chapter could assist him get concessions from collectors however an precise submitting wouldn’t assist him a lot.”

Some monetary restructuring at Twitter is already being explored. Bankers are in discussions with Musk to interchange about $3bn of high-priced unsecured debt that has an rate of interest of 11.75 per cent, with margin loans, backed by Musk’s stake in Tesla, in response to two individuals near the matter.

The banks have been caught holding tens of billions of {dollars} price of debt from different offers struck earlier than final 12 months’s sell-off in monetary markets — however the Twitter deal stands out given its measurement and the tempo at which the enterprise has deteriorated. 

Such a debt swap would hamper Musk’s monetary flexibility. About 63 per cent of his present Tesla shares are already pledged as collateral for loans, in response to company filings. The corporate limits the quantity of inventory that its executives can pledge to 25 per cent of the worth, that means he might be pressured to place up extra of his holdings if Tesla inventory continued to fall, leaving much less to again future borrowing.

Line chart of Tesla shares showing its stock has fallen 25% in the past month alone

In the meantime, with Tesla’s inventory falling 65 per cent final 12 months and Musk promoting closely, the worth of his stake within the firm has plunged to about $50bn, from $170bn when he supplied to purchase Twitter in April final 12 months. That has left him with far much less room to lift money by collateralising extra shares. One different can be to train a few of his inventory choices, although that would go away him with a big — and speedy — tax invoice.

The largest concern for Tesla buyers has been if Twitter continues to bleed money then Musk could must promote extra inventory.

Musk, who was the world’s richest particular person till December following Tesla’s share value crash, put about $26bn into the Twitter deal, together with his pre-existing 9.6 per cent stake in Twitter price $4bn. Since late 2021 he has bought virtually $40bn of shares in Tesla, partly to finance the Twitter acquisition.

He has since tried to lift more cash to fund its operations. Final month, his wealth supervisor, former Morgan Stanley banker Jared Birchall, supplied present fairness buyers an opportunity to extend their place on the identical value they paid in November.

However Twitter’s worth has sunk since Musk took it over. Constancy, which owns a stake within the social media platform by a listed fund, has lower the worth of its holding from $19.7mn in October to $8.6mn after Musk closed the deal.

Expertise fairness analyst Dan Ives at Wedbush Securities stated that Twitter was price nearer to $15bn at present than the $44bn Musk paid for it.

“That’s why nobody is lining as much as tackle this debt, so the banks are holding it and in the end they’re betting on Musk to do what he did with SpaceX and Tesla,” stated Ives, referring to turnrounds Musk orchestrated at every enterprise.

Extra reporting by Hannah Murphy in San Francisco