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

By Paula Seligson

By all accounts — including Elon Musk’s — Twitter has more than enough money to make its first interest payments, expected to total about $300 million. 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 company has about $1 billion in cash on its balance sheet. But he’s also openly floated the idea 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 end of October.

A group 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 go along with any unexpected maneuvers near the interest-payment deadline, roughly around January. 27.

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

“There’s too much 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 give the business time to turn around.”

Representatives for Morgan Stanley and Musk didn’t 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. The longer term is a bigger question: In the Twitter Spaces conversation, he said the company was on pace to lose $3 billion in 2023.

“That is why I spent the last five weeks cutting costs like crazy,” he said.

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

Regardless, the consequences for Musk, 51, who owns an estimated 79 per cent of the company, would be immediate and severe.

While Twitter is on the hook for the debt, and not Musk personally, he put up more than $20 billion for his stake in the company. That’s now worth an estimated $11.6 billion, a sizable part of his $137.4 billion fortune, according to the Bloomberg Billionaires Index.

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

“In terms of who’s got more to lose, it’s certainly Elon Musk,” Brendel said. “Whether he cares whether he loses that or not, that’s a whole different question. He certainly behaves differently than what normal people would do in those situations.”

Wider Negotiations

Musk is known for being unpredictable and could use the first payment in wider negotiations with Twitter’s lenders. He and the banks have been trying to find solutions for the interest burden, which has grown more punitive than when he made his offer 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. stock that he’d be personally responsible for repaying, one of several options considered at the time.

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

There’s also a chance that Musk decides to give up on Twitter and refocus on his other companies including Tesla and SpaceX.

Of course, if Musk walked away, he wouldn’t just hurt himself, but also the other equity backers who joined his investment, such as sovereign wealth fund Qatar Investment Authority, which contributed $375 million.

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

QIA was part of a group of around 20 investors that contributed to the equity commitment, according to a May filing. Saudi Prince Alwaleed bin Talal also rolled over more 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 form of junk bonds.

All 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 transaction.

The interest due in the coming weeks is expected to be about $300 million, according to Bloomberg calculations and market participants not involved in the Twitter deal. That’s based on the debt commitment letter and a maximum interest rate of 11.75 per cent on the unsecured tranche.

This figure could be higher depending on whether the banks increased the interest rate 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 company opted for the one-month rate, it could have paid smaller interest amounts each month rather than a larger sum quarterly.)

Twitter also has a $500 million revolving credit facility, which allows the company to borrow, pay it back and borrow again over the life 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.

In the meantime, Twitter has been searching for creative ways to reduce spending. In some cases it has stopped paying rent on some of its office space, and has also asked employees to try to renegotiate deals with third-party vendors. This week, Twitter auctioned off hundreds of pieces of office furniture.

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

“I wonder what would have happened in 2009 if the Fed had raised rates instead of lowering them,” he said on Jan. 13. “The higher the rates, the harder the fall.”