Will he pay or won't he?
This is the question everyone is asking currently regarding Elon Musk and the debt he contracted to buy Twitter.
The billionaire and the microblogging platform must make the first interest payment on the $13 billion debt he took on to finance the $44 billion acquisition of the social network on Oct. 27.
The debt comes with interest payments of around $1.5 billion a year.
This debt was allocated to Twitter's balance sheet and had been contracted with a group of banks, led by Morgan Stanley and including Bank of America, Barclays, Mitsubishi UFJ Financial, BNP Paribas, Mizuho Financial Group and Societe Generale.
As a result, Twitter has three large pieces of debt: $6.5 billion that was meant to be sold to leveraged-loan investors, and $6 billion of bridge loans, split equally between a secured and unsecured tranche, that banks had planned to sell in the form of junk bonds, according to Bloomberg News.
$300 Million Due by the End of January
All the debt appears to have quarterly interest payments, according to a debt commitment letter filed with the Security and Exchange Commission.
The first payment is due at the end of January. The amount is around $300 million according to Bloomberg News' calculations, which are based mainly on the commitment letter.
A blur surrounds this transaction, stemming from the fact that during a Twitter Spaces forum at the end of December, Musk had painted a dire picture of Twitter's financial situation.
The billionaire, who owns a nearly 80% stake in Twitter 2.0, had raised the specter of bankruptcy. In doing so, he left on the table all options regarding repayment of the company's debt, including a possible default.
He notably had said that before he took control, the platform was on track to post negative cash flow of $3 billion, a scenario that he was doing everything to avoid. At the beginning of November he launched a drastic cost-cut effort, including eliminating half the workforce, or 3,750 people, in one day.
“That is why I spent the last five weeks cutting costs like crazy,” Musk said during a Twitter Spaces in December. "We have an emergency fire drill on our hands."
He continued: "This company is like, basically, you are in a plane that is headed toward the ground at high speed with the engines on fire and the controls don’t work.
"That's the reason for my actions that may seem sometimes spurious."
Musk had also asked the remaining employees to work without counting their hours or to resign. More than a thousand additional employees chose to leave.
Filing for Bankruptcy Is One of Musk's Options
This had caused general chaos, made worse by the decision of many advertisers to pause promoting their products and services on the platform. That occurred after the billionaire determined to reactivate most of the accounts that Twitter 1.0 had banned for violating its policies.
The tech tycoon's laissez-faire approach to content management caused an exodus of advertisers. Consequently, in early November, Musk reported that Twitter was losing $4 million a day.
During Twitter Spaces, the billionaire also said that Twitter's costs were expected to be $5 billion this year, but adding the debt payments brought the figure to $6.5 billion. The firm's total costs and expenses amounted to $5.57 billion in 2021, the most recent year of full reporting, according to a SEC filing. Twitter lost $221.4 million that year.
He had estimated that his efforts to revamp the company would generate about $3 billion in revenue in 2022, down from the $5.1 billion generated in 2021.
But the Techno King showed cautious optimism, saying the company would have around $1 billion in cash on its balance sheet.
"I now think that Twitter will, in fact, be okay next year,” Musk said during the December Twitter Spaces. He added that the firm will "roughly” hit cash flow break-even. But “this will be difficult."
Another unknown is the performance of the Twitter Blue subscription service, the price of which Musk has hiked. Are subscriptions to Blue successful?
"Twitter isn’t secure yet, just not in the fast lane to bankruptcy," the serial entrepreneur said on Dec. 24 on Twitter. "Still much work to do."
Musk has three options. He simply can repay the $300 million interest by tapping into the cash flow he talked about back in December. He can also sell additional Tesla shares to pay that interest.
The banks were considering replacing some of the high-interest debt with new margin loans backed by Tesla stock that the billionaire would be personally responsible for repaying.
The final option the tech tycoon has is to file for corporate bankruptcy to force a restructuring of Twitter's debt.
Given Musk's unpredictable personality, it's hard to know which option he'll choose. Musk in December also announced his resignation as CEO of Twitter. He is currently seeking a successor to take the helm at the social-media company.
