Twitter: What’s next?

Hey, the $44bn buyout of Twitter might be happening!

Or Twitter could be right in its concern that the olive branch from Elon Musk and his team is actually “an effort to delay a trial,” which our colleagues at Due Diligence reported yesterday.

It’s going to be interesting to see how this deal is done, if it is in fact completed. As a couple of outlets have reported, this $44bn deal creates a $13bn issue (incl. the revolving credit line) for the seven banks committed to providing debt financing for the deal: Morgan Stanley is leading the deal, and is joined by Bank of America, Barclays, MUFG, BNP Paribas, Mizuho and SocGen.

In case anyone forgot, interest rates are rising. While that in theory helps demand for floating-rate leveraged loans, it also makes those loans less affordable for borrowers. CreditSights provides a nice look at the cost of this mega-deal in an Oct. 4 note:

The deal was revived to the chagrin of investment banks who are on the hook for the committed financing. The total financing is . . . roughly 10x Ebitda based on 2023 consensus estimates. While Twitter is projected to have ~183mn in free cash flow in 2023 based on street estimates, this does not reflect the LBO’d cap structure.

We estimate roughly ~$1.3bn in annual interest expense based on the terms in the debt commitment letter vs less than $100mn on the existing cap structure. As such, we think Twitter might not be FCF+ until 2025, and it would take both strong revenue growth and significant margin expansion to get there. If this is correct, it could be a tough syndication for the banks, and we will be on the lookout for details around when and how the company plans to market the new financing.

TLDR: That’s a lot of new leverage. Like, more-than-10-times-your-pre-deal-interest-cost type of leverage. And it could leave Twitter with debt around 10x its Ebitda, which is four turns more than the limits given by regulators (first as a rule, and then as a suggestion) after the financial crisis.

In other words, bankers will need to put some extra sweat into their effort to turn the leverage ratchet a bit further, as the friction (fed funds rate) is expected to rise (climb above 4 per cent by year-end 2023).

Twitter’s present-day bondholders should fare considerably better. The company’s current bonds have change-of-control protections. In short, Twitter must offer to buy back their bonds at 101-per-cent of par if the company changes ownership and has its credit downgraded.

Now, these bonds offer a make-whole call as well. But our knowledgeable readers will point out that make-whole bond payouts are discounted at a spread to Treasury yields, which have climbed quite a bit in the past year, with a floor at par.

As of May 16, CreditSights calculated that the make-whole payouts would cost a measly $105mn more than the 101 buyout. The 10-year yield was 2.9 per cent then. Today, with the benchmark trading around 3.8 per cent, the change-of-control put could start to look like a relatively nice deal.