Musk’s Twitter deal is getting more expensive by the day

The leveraged loan’s coupon is based off of the Secured Overnight Financing Rate, and if banks fund the debt it would be at an interest rate of 4.75 per cent over SOFR, according to an April SEC filing.

The one-month term version of this benchmark, which is commonly used in corporate lending, has increased by nearly 3 percentage points since Musk announced the acquisition in April, and is closely related to the Fed’s interest rate.

Musk’s buyout also includes $US6 billion of junk bonds, split equally between secured and unsecured tranches, and would typically be fixed rate once sold to investors. The banks already promised Twitter maximum interest rates on this debt, and the most the unsecured tranche can cost is a coupon of about 11.75 per cent, Bloomberg reported.

The seven banks that committed to provide the debt package in April likely won’t have time to try to sell the bonds and loans to outside investors like they normally would if the deal closes by Oct. 28. They are also providing $US500 million of a type of floating-rate loan called a revolving credit facility that the banks would typically plan to hold themselves, and it’s unknown if that would be drawn or undrawn when the deal closes.

Cash burn

Twitter is expected to burn cash going forward, and might not become free cash flow positive until 2025, Chalfin estimates. “Given significant cash flow burn and high leverage, this is going to be a challenging deal to go out and syndicate to the market,” he said.

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Assuming the deal closes and banks fund the debt, they will likely wait for credit markets to calm and then try to sell the loans and bonds to investors. But potential buyers will have to consider not only the cash burn, but also Musk’s numerous criticisms of Twitter. He spent months trying to get out of the deal and lambasted the social media company over a bot problem and a whistleblower.

On the other hand, Musk is the ultimate backstop. The billionaire and a handful of backers are providing $US33.5 billion of equity to fund the rest of the acquisition, and he will likely want to protect this massive investment.

“There’s a much longer leash for a privatisation by a key man than there would be if it was just a traditional financial sponsor,” said Bloomberg Intelligence analyst Robert Schiffman. “If more capital needs to be put into Twitter, Musk can be their bank.”

Bloomberg

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