Elon Musk has a bigger problem than Twitter bots: a huge debt burden

Elon Musk may be pointing out his buyer’s remorse over Twitter Inc.’s bot problem. But the underpinning of the deal is the $ 13 billion debt bill that seems like a big burden day by day.

The billionaire’s favorite will make a rush before the end of the weed holiday on April 20, and the package, signed by the bank, will leave the social media platform with annual interest costs close to $ 1 billion, giving the company a worryingly small margin for error.

To calm-minded credit analysts, a second thought about the deal is expected.

The purchase will be financed with a leveraged loan and high-yield bonds. CreditSights estimates that this will dramatically increase Twitter’s annual interest expense to about $ 900 million, with Bloomberg Intelligence seeing থেকে 750 million to $ 1 billion.

With such numbers, Twitter seems ready to burn cash, find new sources of revenue and put pressure on Mask to transform the company by reducing costs. The same is true of Wall Street analysts predicting record earnings in 2022, although US recession predictions could be thwarted if those rosy predictions – Musk said Monday that one is already – come true.

John McClain, Portfolio Manager at Brandywine Global Investment Management, said, “This is a bad capital structure for setting up a business like Twitter that has never proven to be very profitable.” “It has been a public company for some time and they never understood how to monetize the consumer in an attractive way.”

Musk himself has expressed skepticism about his own deal, saying this week that he will not move forward unless Twitter proves that less than 5% of its users have created bots.

Debt mask is just one of the three components of financing. He has found 19 other equity investors to join him in a 27 27.25 billion equity pledge. And he has taken a িন 6.25 billion margin loan against his Tesla shares, but he is currently trying to replace it with preferred equity investors, which may include Apollo Global Management Inc. and Sixth Street.

Bankers dragged on all night and worked on the Easter and Passover holiday weekends, rushing to meet the April 20 deadline for creating the financing package. What they’ve cooked will take Twitter deeper into debt, raising its interest costs from $ 53.5 million in the last 12 months.

This gives Mask little room for error, although he is not a hook for debt. In general, like a leveraged buyout, if something goes wrong, Twitter will be stuck paying, while Musk and his associate equity investors can only lose the cash they have in the deal.

Jordan Chalfin, a senior analyst at credit research firm CreditSights, said in an interview that “leverage is really high and free cash flow is going to be negative outside the gates, which of course adds an element of risk to the contract”. “Twitter really needs to grow in their capital structure and increase revenue to cover both their capital expenditure and their interest expense.”

There are also growing fears that a recession could be on the horizon, which would make it a worse time to load up debt on Twitter, as most of its revenue comes from advertising. Robert Schiffman, a Bloomberg Intelligence analyst, says, “In a poor macroeconomic background, the first thing that companies are attracted to in their marketing budgets is the cost of advertising.

Meanwhile, selling corporate debt has become more difficult in recent weeks. Rising rates have hit junk bonds the hardest, and average yields, a proxy for borrowing costs, have risen by more than a percentage point since banks agreed to the Twitter deal by about 7.6%. The market for leveraged loans has also cooled.

Analysts see Twitter posting record earnings of 22 1.67 billion in 2022 before interest, taxes, depreciation and payments. Twitter has forecast a capital expenditure of approximately $ 925 million. Exclude this and Twitter’s new increased interest expense from its Ebitda and the company will burn through cash.

If Mask successfully grows Twitter, the debt burden will become more controllable over time, and the company could hit neutral cash flows in 2023 and positive cash flows in 2024, Chalfin said. If Kasturi can’t deliver on the company’s promise to turn around, the debt burden could become a problem.

Twitter has about $ 6.3 billion in cash and short-term investments that could help burn cash for years to come, says Schiffman of Bloomberg Intelligence.

© 2022 Bloomberg

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