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Musk has ‘much to lose’ if he tries to skip debt payment on Twitter


(Bloomberg) – By all accounts – including Elon Musk’s – Twitter has ample funds to make its first interest payments, which are expected to total around $300 million.

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But with the payday so close, there’s still some worry about what the impulsive billionaire can do to ease the social media company’s $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 he’s also publicly floated the idea of ​​bankruptcy, citing a massive drop in revenue as some advertisers left the platform and layoffs since he completed a leveraged buyout. worth $44 billion at the end of October.

A group of seven banks, headed by Morgan Stanley, own the debt. The tragedy surrounding Musk’s acquisition and the volatile market left them with loans that they would normally pass on to investors.

Now, after they’ve lost about $4 billion on paper for backing Musk’s Twitter bid, market watchers see little reason for the banks to take any unexpected action. near the maturity date, around January 27.

After all, in most bankruptcies, the equity is wiped out – and the lenders end up taking control.

“There is too much risk for Musk and his co-investors,” said Jordan Chalfin, senior analyst at credit research firm CreditSights. “Twitter will make its short-term interest payments, regardless of difficulty or risk, and give businesses time to turn things around.”

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

A few reasons

While with Musk, anything is possible, he doesn’t have much of a reason to skip the first interest payment. Longer-term is a bigger question: In a conversation on Twitter Spaces, he said the company is on track to lose $3 billion by 2023.

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

But in the near term, if Twitter doesn’t pay interest, that could trigger a default, which would allow banks to force the company into Chapter 11 bankruptcy. Some debts allow for extended periods of time. 30-day term, but it’s unclear if that holds for Twitter loans.

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

While Twitter is in debt, not Musk personally, he spent more than $20 billion buying his stake in the company. That sum is now worth about $11.6 billion, a sizable 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 interest, do it the standard way, which is: ‘OK, I’ll see you in bankruptcy,’” said Philip Brendel, a child. suffering debt said. analyst at Bloomberg Intelligence.

“In terms of who has more to gain than to lose, it’s definitely Elon Musk,” Brendel said. “Whether he cares if he loses, that’s a completely different question. He definitely behaves differently from what normal people would do in those situations.”

Broader negotiation

Musk is known to be unpredictable and can use the first payment in broader negotiations with Twitter’s lenders. He and the banks have been trying to find solutions to the interest rate burden, which has become more punitive than when he made his offer in April when interest rates spiked.

Late last year, bankers were considering replacing some of their high-interest debt with new margin loans backed by shares of Tesla Inc.

When Musk sold $3.6 billion in Tesla stock last month, some analysts speculated that he could use the money to buy Twitter debt from banks, putting him in a better position in the future. bankruptcy proceedings. But it’s not clear whether Morgan Stanley and others would be willing to sell him a bargain.

It’s also possible that Musk decided to abandon Twitter and refocus on his other companies including Tesla and SpaceX.

Of course, if Musk leaves, he will not only hurt himself but also other equity backers who have invested in him, such as sovereign wealth fund Qatar Investment Authority. , contributed $375 million.

QIA CEO Mansoor Al Mahmoud said: “We’re working with management, with Elon on the plans he has for the company, and we believe in this, and we believe in its capabilities. his leadership in turning the company around.” a Bloomberg TV interview in Davos on Monday.

QIA is part of a group of about 20 investors who contributed to the equity pledge, according to a May filing. Prince of Saudi Arabia Alwaleed bin Talal also transferred more than 30 million shares, worth about $1.9 billion at the purchase price of $54.20. Jack Dorsey also rolls with his bets.

Debt details

Twitter has three major debts that are coming due in interest: $6.5 billion slated to be sold to investors for leveraged loans, and $6 billion in bridging loans, split equally between a secured and unsecured tranches, which the banks planned to sell at the end of the year. junk bonds.

All debt appears to be paid quarterly, according to an April debt commitment letter, and people familiar with the matter, who asked to remain anonymous, discussed 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. It is based on a letter of commitment and the maximum interest rate is 11.75% for the unsecured installment.

This number could be higher depending on whether the banks raise interest rates on the $6.5 billion tranche using their “flexible” terms when the deal closes and whether Twitter is working on it. use the standard one, three or six month version of the Guaranteed standard. Overnight funding rate. (If the company chooses a one-month interest rate, it may pay a smaller amount of interest each month instead of a larger amount quarterly.)

Twitter also has a $500 million revolving credit facility that allows the company to borrow, pay back, and borrow back over the life of the loan. If Twitter relies on that, interest expenses will increase significantly. Twitter paid a 0.5% annual fee to get access to the funds.

In the meantime, Twitter has been looking for creative 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 agreements with third-party vendors. This week, Twitter auctioned hundreds of pieces of office furniture.

During that time, Musk periodically tweeted about the Federal Reserve’s decision to raise interest rates at the fastest pace in a generation.

“I wonder what would happen in 2009 if the Fed raised rates instead of lowering them,” he said on Jan. 13. “The higher the interest rates, the harder it is to lower.”

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

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