Elon vs. Twitter

Posted by

The basic situation is that Elon Musk is more or less the richest person in the world, and he owns Twitter, and Twitter does not seem to be doing particularly well as a business. If you had the chance to lend money to Twitter, you might reasonably say “no thank you.” But if you had the chance to lend money to Elon Musk, you might reasonably say “sure he’s rich he’ll probably pay me back.” There are some concerns in that reasoning, maybe, but it’s more or less fine. 

In any case, if you have already made the mistake of lending $13 billion to Twitter, you will definitely be better off trying to change that into a loan to Musk himself. Bloomberg reported last week:

Elon Musk’s bankers are considering replacing some of the high-interest debt he layered on Twitter Inc. with new margin loans backed by Tesla Inc. stock that he’d be personally responsible for re-paying, according to people with knowledge of the matter.

The margin loans are one of several options the Morgan Stanley-led bank group and Musk’s advisers have discussed to soften the burden of the $13 billion of debt that Musk used to purchase the social media company in October, said the people, who asked not to be identified because the discussions are confidential.

While many details, including how terms of the swap from one debt to the other would work and how advanced the talks are, remain unclear, the mere fact that the two sides are discussing such an option underscores just how badly this deal has gone for all involved in the six weeks since it was finalized.

The banks have been unable to find buyers for the Twitter debt and are facing the prospect of realizing steep losses. Musk, meanwhile, is under increasing pressure to turn around the finances of a company that was already struggling when he and his partners bought it. Musk put up billions of his own dollars, selling Tesla shares to make the purchase, and pledging more stock to help prop up Twitter now would be risky. It could give Twitter the breathing room it needs to turn operations around, or it could mean Musk is just throwing good money after bad.

The financing discussions have so far focused on how to replace $3 billion of unsecured debt on which Twitter pays an interest rate of 11.75%, the maximum banks had guaranteed Musk when they agreed to finance the acquisition in April, the people said. The company is estimated to face annual interest costs of about $1.2 billion based on the current debt structure, more than a measure of Twitter’s earnings for the whole of 2021. It’s unclear what the rate would be on the margin loan.

In April, when Musk got commitments for a Tesla margin loan to fund his Twitter buyout (which he later canceled), the rate was three-month SOFR plus 3%, which works out to about 7.5% at today’s rates. But “how terms of the swap from one debt to the other would work” is the key question. If the Twitter loans are worth about 60 cents on the dollar, then in theory Musk should be able to replace $3 billion of 11.75% Twitter debt (which costs about $350 million a year) with about $1.8 billion of 7.5% margin debt (which costs about $135 million a year). For the banks, that is a painful trade — it locks in a $1.2 billion loss on that unsecured debt, which they bought at $3 billion and would sell back at $1.8 billion — but probably rational.

For Musk, it’s a good trade — cheaper debt and less of it — as long as he is really sure he wants to own Twitter. Right now, if Musk stops paying Twitter’s debt, the worst thing that can happen is they’ll take Twitter away from him. He’s sunk something like $30 billion of his own money into Twitter, so that would hurt; on the other hand, sometimes it seems like he is desperately crying out for someone to take Twitter away from him. But if he takes out margin loans to keep Twitter going, and he stops paying those loans, they can take (some of) his Tesla stock away from him. The debt would not be Twitter debt anymore, but Elon Musk debt. To the extent that Twitter is already an extension of Elon Musk, though, that would not be a huge psychological change, and it would save him some money.