Banks Unload Twitter Debt

"Plop plop. Fizz, fizz. Oh what a relief it is"

Readers of a certain age may remember the classic Alka-Seltzer antacid TV ads from the 1970’s, two of which stick out in my mind. One featured a man with an upset stomach sitting up in bed late at night, looking quite ill and repeating over and over “I can’t believe I ate the whole thing”. And the other featured the catchy jingle “Plop plop. Fizz fizz. Oh what a relief it is”. Which must be just about how Morgan Stanley and the other Twitter lending banks feel right about now.

As you may recall, Morgan Stanley advised Elon Musk in his $44 billion acquisition of Twitter, in a deal agreed almost three years ago (April 2022). The acquisition was funded with $31 billion of equity and $13 billion of bank debt (loans). Elon Musk personally put up about $25 billion of the equity, funded largely from sales of his Tesla shares, and Morgan Stanley and a small group of banks made the loans. At the time of the acquisition, the lending banks were unable to syndicate the debt more broadly—no other banks wanted to participate—and the lending banks have for several years been trying to unload the debt they took on without success, until now.

This week, the WSJ reported that Morgan Stanley and the other lending banks had finally sold off a large chunk of their Twitter (X) debt. According to the WSJ, the banks sold $5.5 billion (face value) of loans at a price of 97, representing a loss to the banks of around $165 million, a much better price (for the banks) than had been expected even a few days prior. The WSJ was a bit vague on some of the details, but it would appear that the loans which have been sold are senior in the X capital structure and bear an interest rate of around 11%. The article suggested that this was a floating rate, so we are talking about a credit spread of 650 bp or so over SOFR. By contrast, the current yield on the ICE BofA high yield bond index is around 7%, some 400bp lower than the rate on the X senior debt, which seems to have been priced at CCC levels. (Non-investment grade credit ratings run from BB at the top end to CCC at the bottom, with D reserved for credits in default.)

Keep in mind that this is Twitter’s senior debt we are talking about. The company also owes the banks another $6 billion or so which is structured as some form of junior (subordinated) debt, and which the banks have been unable to refinance in the bond market. And while Twitter’s junior debt is apparently not yet ‘distressed’ (nearing default), it is certainly Junk, with a capital J.

How can the Twitter credit be this bad, you might ask, given that Musk and his co-investors put up $31 billion in equity to underpin $13 billion of loans extended to a company valued at the time at $44 billion, a loan-to-value ratio of 30%? One answer, I suppose, is that Twitter was never really worth anywhere near $44 billion, and the $31 billion raised in equity all went to the sellers of Twitter shares, and was not invested into the company per se. The implied market value of Twitter shares before Musk surfaced as a buyer was roughly half (or less) of the price that Musk eventually agreed to pay for the whole company, and Twitter at that time carried very little debt (by memory $1bn or so). Twitter’s total annual revenues at that time were around $5 billion, with $650 million of EBITDA and little free cash flow available to service a large amount of debt.

One night reasonably ask why anyone in their right mind would have lent Twitter $13 billion, or for that matter would willingly have paid $44 billion for a company with these sorts of financial metrics. As you may recall, Elon Musk tried very hard to walk away from his legal commitment to buy Twitter, apparently coming to his senses about the financial reality rather late in the process. But Musk had signed an iron-clad contract committing him to buy Twitter and he was forced to go through with the deal by the Delaware courts, the same courts that later voided his $50 billion options package. As a result, Musk’s banks were also forced to perform on their lending commitments, and to fund a deal they may have thought (and certainly hoped) would never close.

But there may be another angle to this story as well. At the time they made their funding commitments, Morgan Stanley and the other lending banks may not have thought much of Twitter itself but they certainly thought very highly of Elon Musk, and with good reason given his track record at Tesla. And so the bankers’ lending decision may have been based less on traditional credit analysis than on a belief that Musk could work his magic on Twitter, as he had at his other companies, and of course on a strong desire to cement their business relationships with Musk.

So what sort of magic did the lenders believe Musk would weave at the newly acquired Twitter? I have no idea what the banks thought might happen at the time they made their lending commitments, but what did in fact happen was not pretty. Almost immediately after he took control of Twitter, Musk discarded the company’s “woke” content-control policies, inviting Donald Trump and others back onto the platform and in the process losing millions of disgruntled Twitter users. He famously and quite publicly told advertisers who didn’t like his new content policies to “go f-ck themselves”, and a number of large advertisers duly departed. He stopped Twitter from paying some of its overdue bills (eg for rental expense) and in one fell swoop he fired 80% of Twitter’s employees, who for the most part have not been replaced. As a result of Musk’s moves, Twitter’s revenues fell by half but EBITDA doubled, due largely to the much lower compensation expense. But as a result of its new capital structure, Twitter also found itself with $13 billion of debt and insufficient cash flow to pay interest on the debt, let alone to begin amortizing any principle.

As a result of Twitter’s precarious financial position, the lending banks have until recently had no real prospect of selling their loans at prices anywhere near par value. Over the past several months, however, Twitter has apparently seen some improvement in its base of users and advertisers, most likely due to Musk’s highly visible (if controversial) position in the Trump administration and his aggressive promotion of all things branded “X”. The company has also taken a 10% equity stake in Musk’s xAI venture, which reportedly has an implied value of around $5 billion, adding some ‘sizzle’ to the Twitter story and some incremental equity buffer (but no cash flow) to support the company’s heavy debt load. And with these developments, credit investors’ interest in the Twitter loans has recently increased, allowing the lending banks to offload a big chunk of their debt at a discounted but palatable price of 97 cents on the dollar.

Even after the latest loan sale, however, Morgan Stanley and the original Twitter lending banks are still nursing big unrealized losses on their remaining debt exposure, perhaps as much as $1 billion, with no near-term exit in sight. I don’t know when the $13 billion of Twitter loans are scheduled to mature and will need to be refinanced, but as this date approaches there will be some ‘interesting’ negotiations to be had between the company’s lending banks and Musk, with Morgan Stanley no longer in control of the situation.

As a result of the recent loan sales, the original lending banks are now experiencing some much-needed digestive relief. But unless Twitter’s financial performance continues to improves rather dramatically, it may not be long before the banks’ stomach acid begins to churn once again. At which point the sound of “plop plop, fizz fizz” will likely be replaced with another chorus of “We can’t believe we ate the whole thing”.

Links

Banks Sell $5.5 billion of X Loans after Investor Interest Surges, WSJ, 5 February, 2025

Twitter Accepts Musk’s Offer in $44 billion Deal, WSJ, 25 April, 2022