Musk has more to lose if he tries to skip paying Twitter’s debt

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

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But with a payment date fast approaching, there remains some concern about what the impulsive billionaire might do to relieve the social media company’s $12.5 billion debt.

Yes, Musk said in a conversation on Twitter Spaces in late December that the company had about $1 billion in cash on its balance sheet. But he also floated the idea of ​​bankruptcy publicly, citing a “massive drop” in revenue as some advertisers fled the platform and cut staff since it closed the $44 billion acquisition at the end of October.

The debt is owned by a group of seven banks led by Morgan Stanley. The drama surrounding the Musk acquisition and volatile markets have left a heavy burden on loans, which it would normally have relegated to investors.

Now, after losing about $4 billion on paper backing Musk’s bid on Twitter, market spectators see little reason for banks to keep up with any unexpected maneuvers near the interest payment deadline, roughly January 27th.

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

“There’s a lot at stake for Musk and his co-investors,” said Jordan Chalfin, senior analyst at credit research firm CreditSights. “Twitter will make interest payments in the near term, come to hell or rise, and give the business time to come back.”

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

Few reasons

While anything is possible with Musk, he doesn’t have many reasons to skip his first interest payment. The longer term is a bigger question: In a Twitter Spaces chat, he said the company was on track 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, which would allow the banks to force the company into Chapter 11 bankruptcy. Some debts allow a 30-day grace period, but it’s unclear if that exists for Twitter loans.

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

While Twitter is on the hook for debt, not Musk personally, he has paid over $20 billion for his stake in the company. He’s now valued at $11.6 billion, a significant portion of his $137.4 billion fortune, according to the Bloomberg Billionaires Index.

“If you’re a Twitter lender and Elon Musk threatens not to pay the coupon, you go to the standard game guide, which is, ‘Okay, I’ll see you bust,’” said Philip Brendel, a debt distressed analyst at Bloomberg Intelligence.

“As far as who is going to lose the most, it’s almost certainly Elon Musk,” Brendel said. “Whether he cares whether or not he loses it is a completely different question. He definitely acts differently than normal people would do in those situations.”

wider negotiations

Musk is known to be unpredictable and could use the down payment in broader negotiations with Twitter lenders. He and the banks have been trying to find solutions to the interest burden, which is becoming more punitive than it was when he made his bid in April as interest rates soared.

Late last year, bankers were considering replacing some of the high-interest debt with new margin loans backed by Tesla Inc. which he would be personally liable to pay off, one of several options being considered at the time.

Since Musk sold $3.6 billion in Tesla shares last month, some analysts have speculated that he may use the funds to buy Twitter’s debt from banks, which would put him in a better position in the bankruptcy proceedings. But it is not clear whether Morgan Stanley and others would willingly sell to him at such low selling prices.

There is also a chance Musk may decide to ditch Twitter and refocus on his other companies including Tesla and SpaceX.

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

Mansour Al-Mahmoud, CEO of the Qatar Investment Authority, said: “We are dealing with management, with Elon regarding the plan he set for the company, and we believe in that, and we trust his leadership in terms of changing the course of the company.” Bloomberg TV interview in Davos on Monday.

The Qatar Investment Authority was part of a group of about 20 investors who contributed to the equity commitment, according to a report in May. Saudi Prince Al-Waleed bin Talal also circulated more than 30 million shares valued at approximately $1.9 billion using the purchase price of $54.20. Jack Dorsey rolled his stake, too.

Debt details

Twitter has three large chunks of debt accruing with interest: $6.5 billion that was meant to be sold to leveraged loan investors, and $6 billion in bridging loans, split evenly between a secured and unsecured tranche, that the banks planned to sell in some form of junk bond. In which.

All of the 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 discussing a private deal.

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. It is based on a letter of debt obligation and a maximum interest rate of 11.75% on the unsecured tranche.

That number could be higher depending on whether the banks raised the interest rate on the $6.5 billion tranche using their “flexible” provisions when the deal closed, and whether Twitter used a one-, three- or six-month version of the standard Secured funding rate. night. (If the company chose a one-month rate, it might have paid smaller amounts of interest each month instead of paying a larger amount every three months.)

Twitter also has a $500 million revolving credit facility, which allows the company to borrow, pay off, and borrow again over the life of the loan. If Twitter relied on it, interest expense would increase exponentially. Twitter already pays a 0.5% annual fee to access the funds.

Meanwhile, Twitter is looking for innovative ways to reduce spending. In some cases, it has stopped paying rent for some of its office space, and has also asked employees to try to renegotiate deals with outside vendors. This week, Twitter auctioned off hundreds of pieces of office furniture.

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

He said on January 13: “I wonder what would have happened in 2009 if the Fed had raised interest rates instead of lowering them. The higher the rates, the harder it would be to come down.”

— With assistance from Janine Amodio, Lisa Lee, and Kurt Wagner.

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