Twitter Debt Burden Likely with Pointers From Tesla Share Sales

While offloading nearly $3.6 billion worth of Tesla Shares this week, Elon Musk offered some financial advice on Twitter. He cautioned against debt after Federal Reserve hiked interest rates by another half percent.

Musk belongs to those groups that should be concerned about debts during turbulent economic times. He has piled on a high-interest debt of $13 billion towards his acquisition of Twitter Inc. Out of this debt, a $3 billion bond is at a high fixed coupon rate of 11.75%. This portion can, however, be extinguished by the recent sale of Tesla shares.

Musk will find buying Twitter’s debts attractive as it will save the company about $350 million in annual interest outgo, according to calculations by Bloomberg. Also, Musk will be able to purchase bonds at a high discount and thus lower the debt burden of Twitter Inc. If Musk takes over Twitter’s debts, he could put himself in a better position in case Twitter’s financial conditions worsen. Last month, he raised the specter of bankruptcy to Twitter employees.

Morgan Stanley, who led the debt transactions for Twitter, did not comment on the issue. It remains to be seen how Musk, along with his bankers, proceed. Both, however, have stakes for Twitter Inc. to succeed. Musk has his equity investment along with other investors totaling $33.5 billion. The banks want to protect the $13 billion of loans they gave to Twitter, which is currently reflected on the company’s balance sheet.

If Musk tries to purchase Twitter’s debt from banks, he will try to do so at steep discounts, a typical strategy deployed during distressed debt situations. This will result in the lending banks suffering huge losses, and the decision to offload their debts to Musk could be complicated.

Large Bet

The debt financing consists of a $6.5 billion secured loan component at a floating rate and another $6 billion of bonds split into secured and unsecured tranches. The secured loans have lower risk as Twitter backs them asserts and thus have a lower interest rate.

Last month Hedge funds offered to buy older secured loans at a discount of 40%, which the banks did not sell as the bids were unattractive.

If banks and Musk agree to some kind of a deal, the question arises of how the debt of Twitter can be sold. Either Musk can buy it personally, and technically Twitter will have to pay the interest on the debt to Musk. Alternatively, if Musk can infuse more equity funds into Twitter, then Twitter can repay the debts to the banks and, in effect, save interest in the whole process.

More Control

Owning the debt would give Musk more control and leeway in the worst-case scenario of twitter declaring bankruptcy. The amount of debt held by Musk would determine his position during restructuring.

Banks have replaced riskier bonds with new loans backed by Tesla stock. One of the many options discussed is to soften the company’s interest burden, as per reports from Bloomberg last week.

Cash infusion by Musk into Twitter would be a risky option. It may provide Twitter with the necessary breathing space, but it also means Musk is giving good money to a bad situation.