If Elon Musk’s off-the-cuff financial statements are accurate, Twitter’s creditors should brace themselves for a potential default. On Tuesday, the billionaire entrepreneur made an impromptu appearance on the platform’s live audio service and told listeners the situation was “not good”.
Musk cast himself in the role of austerity saviour, saying that before his cost cuts Twitter’s outflows were set to reach $6.5bn next year, including interest payments. His forecast of $3bn in revenue and $1bn in cash gave Twitter less than a year before it needed to raise more funds or risk missing payments.
Job cuts lower outflows, albeit that redundancy payments will eat into savings. Musk has removed half the workforce. Others have left voluntarily and workers are under order to find $1bn in infrastructure savings. If he can halve costs, Musk can push the crunch point forward to early 2024.
Of course, costs may rise, eroding that advantage. Twitter has $12.5bn of debt as the result of Musk’s leveraged buyout, creating $1.5bn of annual debt servicing costs. Twitter is, by extrapolation, paying an eye-watering interest rate of around 12 per cent. This is partly because of rising rates but it is also a marker of the high risks perceived by lenders. Intangibles and short-term investments make up a large proportion of Twitter’s assets. Most of the debt is unsecured.
Banks still appear to have underestimated the problems ahead. The company has not reported an annual profit since 2019. But at least revenue was growing before Musk arrived. Now it is forecast to drop 40 per cent from 2021, the last full year of results prior to the takeover. The fall reflects a worse exodus of advertisers than rivals have experienced. S&P Global expects social media peer Snap to report 23 per cent revenue growth over the same time period.
This is Musk’s fault. Advertisers are unhappy that his relaxation of moderation has increased the risk of adverts appearing alongside abhorrent content.
Investors, including Musk, could lose their equity. Filing for Chapter 11 bankruptcy would allow the company to reorganise and even raise new funds to support ambitious Super App plans. But creditors would have to agree. They could also take control of the company.
Musk may opt to buy the debt himself. But if banks offload it elsewhere, Twitter may end up in the hands of distressed debt funds. From frying pan to fire in one easy flip.
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