A huge debt load

A huge debt load

Bloomberg — Elon Musk may turn his buyer’s remorse to the Twitter Inc. (TWTR) bot problem But $13 billion in debt is undermining the deal, which seems like a bigger burden every day.

The package, hastily prepared and signed by banks ahead of the April 20 holiday, will leave the social media platform with an annual interest expense of close to $1 billion, giving the company some margin for error. alarmingly small.

For serious credit analysts, hopefully they will rethink the deal.

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

With these figures, Twitter appears ready to burn cash, mounting pressure on Musk to transform the company by seeking new revenue streams and cutting costs.. Even Wall Street analysts are forecasting record profits in 2022, though those rosy forecasts could be jeopardized if predictions of a U.S. recession, which Musk said on Monday was already underway, come true.

“This is just a bad capital structure to put into a business like Twitter that has never proven highly profitable,” said John McClain, portfolio manager at Brandywine Global Investment Management. “It’s been a public company for quite some time and they’ve never really seemed to figure out how to monetize in a way that’s attractive to the consumer.”

Musk himself is casting doubt on his own deal, saying this week that he won’t proceed unless Twitter proves that bots make up less than 5% of its users.

Debt is just one of three components of Musk’s financing. He has found 19 other equity investors who have joined him in $27.25 billion of equity commitments.. And it has taken out a $6.25 billion margin loan against its shares in Tesla (TSLA), but is currently trying to replace that by bringing in preferred equity investors, which could include Apollo Global Management Inc. (APO) and Sixth Street.

The bankers spent sleepless nights and worked during Holy Week and Easter weekends, rushing to meet Musk’s April 20 deadline to create funding package. What they prepared will lead Twitter into much greater debt, increasing its interest costs by $53.5 million over the last 12 months.

Also Fears are growing that a recession could be on the horizon, which would make this an even worse time to saddle Twitter with debtsince most of their income comes from advertising. “In a bad macroeconomic context, the first thing companies throw away in terms of marketing budgets is advertising spending,” said the analyst at Bloomberg Intelligence Robert Schiffman.

In the meantime, the sale of corporate debt has become more difficult in recent weeks. Junk bonds have been hit hardest by the rate hike, and the average yield, a gauge of the cost of borrowing, has risen more than a percentage point since banks agreed to the Twitter deal, to around to 7.6%. The leveraged loan market has also cooled off.

Analysts forecast that Twitter Posts Record Earnings Before Interest, Taxes, Depreciation and Amortization (Ebitda) of $1.67 Billion in 2022. Twitter has forecast about $925 million of capital expenditures. If you deduct that and Twitter’s new interest expense increase from its Ebitda, the company would be burning through cash.

If Musk manages to grow Twitter, the debt load will become more manageable over time, and the company could become cash flow neutral in 2023 and positive in 2024.according to Chalfin. If Musk can’t deliver on his promises to turn the company around, the debt burden could become an issue.

Twitter has about $6.3 billion in cash and short-term investments that could sustain a cash burn for a few years, said Bloomberg Intelligence’s Schiffman.

This article was translated by Andrea González


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