Musk Has ‘More to Lose’ If He Tries to Skip Twitter Debt Payment

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

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But with the payment date fast approaching, there’s nevertheless some anxiety over what the impulsive billionaire might do to ease the social-media company’s $12.5 billion debt burden.

Yes, Musk said in a late December Twitter Spaces conversation that the corporate has about $1 billion in money on its balance sheet. But he’s also openly floated the concept of bankruptcy, cited a “massive drop” in revenue as some advertisers fled from the platform and slashed staff since closing his $44 billion leveraged buyout at the tip of October.

A bunch of seven banks, led by Morgan Stanley, own the debt. The drama around Musk’s acquisition and volatile markets left them saddled with the loans, which they normally would have offloaded to investors.

Now, after they lost some $4 billion on paper for backing Musk’s Twitter bid, market onlookers see little reason for the banks to associate with any unexpected maneuvers near the interest-payment deadline, roughly around Jan. 27.

In spite of everything, in most bankruptcies, the equity is worn out — and lenders eventually take control.

“There’s an excessive amount of at stake for Musk and his co-investors,” said Jordan Chalfin, a senior analyst at credit research firm CreditSights. “Twitter will make its near-term interest payments, come hell or high water, and provides the business time to show around.”

Representatives for Morgan Stanley and Musk didn’t reply to requests for comment.

Few Reasons

While anything is feasible with Musk, he doesn’t have many reasons to skip the primary interest payment. The long run is a much bigger query: Within the Twitter Spaces conversation, he said the corporate was on pace to lose $3 billion in 2023.

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

But within the near term, if Twitter didn’t pay its interest, that would trigger a default, which might allow the banks to force the corporate into Chapter 11 bankruptcy. Some debt allows for a 30-day grace period, however it’s unclear if that exists for the Twitter loans.

Regardless, the implications for Musk, 51, who owns an estimated 79% of the corporate, can be immediate and severe.

While Twitter is on the hook for the debt, and never Musk personally, he put up greater than $20 billion for his stake in the corporate. That’s now value an estimated $11.6 billion, a large a part of his $137.4 billion fortune, in response to the Bloomberg Billionaires Index.

“When you’re a lender to Twitter and Elon Musk is threatening to not pay the coupon, you go to the usual playbook, which is: ‘OK, I’ll see you in bankruptcy,’” said Philip Brendel, a distressed debt analyst at Bloomberg Intelligence.

“By way of who’s got more to lose, it’s definitely Elon Musk,” Brendel said. “Whether he cares whether he loses that or not, that’s an entire different query. He definitely behaves in a different way than what normal people would do in those situations.”

Wider Negotiations

Musk is understood for being unpredictable and will use the primary payment in wider negotiations with Twitter’s lenders. He and the banks have been trying to search out solutions for the interest burden, which has grown more punitive than when he made his offer in April as rates of interest soared.

Late last yr, bankers were considering replacing a few of the high-interest debt with recent margin loans backed by Tesla Inc. stock that he’d be personally liable for repaying, one in all several options considered on the time.

As Musk sold $3.6 billion of Tesla shares last month, some analysts speculated that he could use the cash to purchase Twitter debt from the banks, putting him in a greater position in bankruptcy proceedings. But it surely’s not clear whether Morgan Stanley and others would willingly sell to him at fire-sale prices.

There’s also a likelihood that Musk decides to offer up on Twitter and refocus on his other firms including Tesla and SpaceX.

After all, if Musk walked away, he wouldn’t just hurt himself, but additionally the opposite equity backers who joined his investment, akin to sovereign wealth fund Qatar Investment Authority, which contributed $375 million.

“We engage with the management, with Elon by way of the plan that he has for the corporate, and we consider on this, and we trust his leadership by way of turning around the corporate,” QIA Chief Executive Officer Mansoor Al Mahmoud said in a Bloomberg TV interview at Davos on Monday.

QIA was a part of a bunch of around 20 investors that contributed to the equity commitment, in response to a May filing. Saudi Prince Alwaleed bin Talal also rolled over greater than 30 million shares, valued at about $1.9 billion using the $54.20 purchase price. Jack Dorsey rolled over his stake, too.

Debt Details

Twitter has three large pieces of debt with interest coming due: $6.5 billion that was meant to be sold to leveraged-loan investors, and $6 billion of bridge loans, split equally between a secured and unsecured tranche, that banks had planned to sell in the shape of junk bonds.

All of the debt appears to have quarterly interest payments, in response to an April debt commitment letter and other people acquainted with the matter, who asked to not be named discussing a personal transaction.

The interest due in the approaching weeks is anticipated to be about $300 million, in response to Bloomberg calculations and market participants not involved within the Twitter deal. That’s based on the debt commitment letter and a maximum rate of interest of 11.75% on the unsecured tranche.

This figure may very well be higher depending on whether the banks increased the rate of interest on the $6.5 billion tranche using their “flex” provision when the deal closed, and whether Twitter is using the one-, three- or six-month version of the benchmark Secured Overnight Financing Rate. (If the corporate opted for the one-month rate, it could have paid smaller interest amounts every month moderately than a bigger sum quarterly.)

Twitter also has a $500 million revolving credit facility, which allows the corporate to borrow, pay it back and borrow again over the lifetime of the loan. If Twitter draws on it, interest expense would increase significantly. Twitter is already paying an annual 0.5% fee to have access to the funds.

Within the meantime, Twitter has been trying to find creative ways to cut back spending. In some cases it has stopped paying rent on a few of its office space, and has also asked employees to attempt to renegotiate deals with third-party vendors. This week, Twitter auctioned off a whole lot of pieces of office furniture.

All of the while, Musk periodically tweets in regards to the Federal Reserve’s decision to boost rates of interest on the fastest pace in a generation.

“I’m wondering what would have happened in 2009 if the Fed had raised rates as a substitute of lowering them,” he said on Jan. 13. “The upper the rates, the harder the autumn.”

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

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