In December, Mr. Musk’s representatives discussed selling up
to $3 billion in new Twitter shares, people familiar with the matter said.
Mr. Musk’s team has said to people familiar with the finances
of the company that an equity raise, if successful, could be used to pay down
an unsecured portion of the debt that carries the highest interest rate within
the $13 billion Twitter loan package, people familiar with the matter said.
Paying off the debt would provide welcome financial relief
to Twitter, which has struggled to keep advertisers on the platform. In
November, Mr. Musk said Twitter had suffered “a massive drop in revenue” and
was losing over $4 million a day. He also said that month that bankruptcy was a
possibility for the company, although Mr. Musk later shared more upbeat
prospects for the company, saying he expects Twitter to be roughly cash-flow
break-even in 2023 as he has slashed some 6,000 jobs.
The state of the fundraising talks couldn’t be learned. In
mid-December, Mr. Musk’s team reached out to new and existing backers about
raising new equity capital at the original Twitter takeover price.
Mr. Musk’s advisers had hoped to reach a deal to raise cash
at the initial takeover price by the end of 2022, according to an email sent to
prospective investors at the time. However, some prospective backers said they
balked at the terms, given concerns about Twitter’s financial performance. The
Musk team didn’t specify a funding amount or purpose for the fundraise in the
email.
Fidelity, one of the co-investors that backed Mr. Musk’s
takeover of Twitter, wrote down its stake in Twitter by 56% in November, public
filings show, suggesting Mr. Musk would face an uphill battle raising funds at
the original valuation from outside investors. The banks holding the $13
billion in debt that backed his takeover of the company haven’t yet received
any formal notice of any repayments, people familiar with the matter said.
Representatives for Mr. Musk didn’t respond to requests for
comment.
Twitter’s unsecured bridge loans, which total $3 billion,
are the most expensive portion of the $13 billion debt package Mr. Musk
incurred as part of his $44 billion acquisition of the social-media company.
They carry an interest rate of 10% plus the secured overnight financing rate, a
benchmark interest rate that has shot up in recent months and currently sits at
4.3%.
With every quarter that passes without Twitter refinancing
the debt, the interest rate goes up by an additional 0.50 percentage point,
according to regulatory filings. Twitter’s first quarterly interest payment is
due at the end of the month, the filings show.
Twitter’s annual interest burden has increased by over $100
million since he announced the takeover deal last April, as the overnight rate
has increased. At the time of the announcement, the overnight rate was 0.3%.
Twitter’s total interest expense has been estimated to be
roughly $1.25 billion a year, according to a December analysis by Jeffrey
Davies, a former credit analyst and founder of data provider Enersection LLC.
By that estimate, Twitter is incurring roughly $3.4 million every day in
interest-payment obligations.
On Dec. 13, Mr. Musk tweeted “beware of debt in turbulent
macroeconomic conditions, especially when Fed keeps raising rates.”
Repaying the unsecured bridge loans would leave Twitter with
a debt burden that has much more manageable interest rates. Twitter’s $6.5
billion in term loans and $3 billion in secured bridge loans carry an annual
interest burden of 4.75% and 6.75%, respectively, plus the overnight rate,
according to public filings.
A potential deal would also provide a degree of relief for
the banks that backed Mr. Musk’s takeover of the social-media company and that
intended to sell the debt to third-party investors but changed course after
deteriorating market conditions sank Wall Street’s appetite for exposure to
risky bonds and loans.
The $13 billion of Twitter debt on bank balance sheets, one
of the biggest “hung deals” of all time, has helped contribute to a drag in the
number of mergers and acquisitions as banks’ firepower to back deals is tied
up.
Morgan Stanley, the lead bank on Twitter’s debt deal, has
approximately $807 million in unsecured bridge debt on its balance sheet, while
Bank of America Corp., Barclays PLC and MUFG Bank Ltd. each have approximately
$623 million of exposure, according to public documents and calculations by The
Wall Street Journal.
Each of the four banks have more than $2 billion in other
Twitter debt commitments on their balance sheets separate from the unsecured
bridge facility, including term loans and other secured debt, the documents
show.
Representatives of those banks declined to comment. - WSJ