Twitter Inc (NYSE:TWTR) is yet to generate any positive headlines relating to its finances since Elon Musk took it over, having only bred stories of layoffs, falling revenues and, this week, the halving of its value in the last six months.
What makes the situation all the more intriguing is billionaire owner Elon Musk’s conviction that the social media giant might become cash-low positive as early as the second quarter.
“The actual potential here for Twitter revenue is gigantic,” he said in early March, likely eyeing a much-needed option to pay off the US$13bn debt racked up when he bought the site.
Musk borrowed a chunk of cash from a consortium of banks, led by Morgan Stanley (NYSE:MS), to finance his US$44bn takeover in October, leaving Twitter with quarterly interest charges in the region of US$300mln.
The debt is made up of a $6.5bn senior secured term loan facility, a US$3bn senior secured bridge loan facility and a US$3bn senior unsecured bridge loan facility, with the additional US$0.5bn tied up in Twitter’s senior secured revolving facility.
Given Twitter’s revenue has reportedly slumped by 40% in recent months, as advertisers have flocked from the site, how it will sustain the payments of US$1.2bn a year begs the vital question.
How has Musk tackled the debt so far?
Twitter last reported a profit in 2019, though it has penned losses in eight of the last ten years.
Musk has already laid off most Twitter’s staff to reduce costs, cutting headcount from roughly 8,000 to 2,000 workers over the past sixth months.
This could save up to US$1.4bn a year based on average Twitter salaries, according the Wall Street Journal – though this hasn’t come without its issues.
He has also looked to monetise the site, introducing a paid-for subscription service which had attracted 450,000 users by early March, as per figures from software developer Travis Brown.
Aside from further paywalls, which look likely as Musk announced more benefits for paying users on Monday, and chasing advertisers to return, Twitter seems left with few options.
Musk had explored the sale of £3bn worth of shares in December in order to raise funds, offering common stock for US$54.20, the Financial Times reported, though whether this develops remains to be seen.
He also offloaded some US$23bn worth of Tesla Inc (NASDAQ:TSLA) shares last year, likely to finance his Twitter takeover, leaving him with a 13% stake, valued at around US$84.89bn in early March, according to analysts at WallStreetZen.
In December, he subsequently said he would stop selling the EV maker's stock, cutting off another way of financing or even wholly paying off the looming debt.
Could a write-down be necessary?
This week Musk revealed Twitter's value had dropped to US$20bn and Morgan Stanley (NYSE:MS) and co. might have little choice but to write down its debt.
Musk’s lenders were reportedly mulling this early as last December, according to Reuters, as things already went from bad to worse for the site.
US$10bn of the debt could be written down as much as 20%, Reuters wrote, though a 5-10% range is more likely say analysts, with the focus expected to ultimately rest on the unsecured US$3bn section.
Boston College law school professor Brian Quinn suggested the banks may be weary of “potentially future business with Tesla and SpaceX” - Musk’s other companies - pushing them to negotiate on the debt.
“When the banks look at Musk, they are looking beyond just Twitter,” he said.
“They may decide that it’s worth it to them to take 50 cents on the dollar in order to keep open the possibility of future business with Twitter and the rest of the Musk universe.”