When Elon Musk told workers at Twitter that the company's bankruptcy "isn’t out of the question” the only people who would have winced nearly as much as the employees were the lenders who put up US$13bn of acquisition financing to fund the US$44bn purchase of the social media company.
Their uneasiness would have only increased late last week with employees quitting or being fired in droves, the company closing its offices to staff and "#RIPTwitter" trending on the platform.
It is not the kind of background that will help the banks – led by Morgan Stanley, Bank of America, Barclays, MUFG, BNP Paribas, Mizuho and Societe Generale – offload the debt or refinance it in the high-yield bond market. Even absent Musk's manic mischief, the terms at which the loans were agreed already look way off the market thanks to interest rate rises in the US since they were agreed in April and worries about an impending recession.
"I'm fairly sure the debt isn't sellable when you have headlines every day about people being fired and hired back and the CEO is saying the company might go bankrupt,” said one leveraged finance banker. “It's really your worst nightmare as an underwriter to have that noise around the company when you're trying to do the financing ... Banks will probably just wait for the noise to subside and hope that there will be some people to buy it.”
One restructuring adviser said that he was sure that banks were offering the bridge loan to the market at 60 cents on the dollar, but loan bankers at the underwriters and elsewhere insisted that wasn't the case.
Banks could break ranks and sell, but they would have to inform Musk and agent bank Morgan Stanley. If a bank decided to sell first it would be effectively severing its relationship with Musk and Morgan Stanley. A banker said it was hard to imagine any of the underwriters doing that, and there would be little point in selling down the loan now in a market where appetite is low and there is so much noise.
They will certainly already be writing down the debt internally, although at what level is hard to determine. “How the banks are marking the debt is difficult to guess, but 60 sounds too low,” said the banker.
Still, it is certainly possible, with bankers pointing out that marking at 60 or below may be helpful to banks if they are able to syndicate at higher prices next year and so show a profit. Another leveraged finance banker said taking “a really heavy mark on Twitter now” before selling next year would be preferable to “moving the risk completely off the books now”.
Whether Musk was serious or not – and he has a history of making similarly dramatic pronouncements at his other companies – it is not hard to see a situation where Twitter is in serious jeopardy or at least requires Musk to put in fresh money. Such scenarios would become even more likely if a lack of engineers means it hits technical trouble, Musk continues to alienate advertisers or it is subject to significant fines for regulatory breaches from the European Union or the US Federal Trade Commission.
The company faces interest payments totalling close to US$1.2bn in the next 12 months. That exceeds Twitter's most recently disclosed cashflow, which amounted to US$1.1bn at the end of June. And because those interest payments are linked to SOFR (unless they have been swapped to a fixed rate) that will only increase as rates go up as expected.
The suggestion that bankruptcy was a looming possibility led many in the market to consider how it would come about – and some beginning the process of wargaming how to get involved in that process. “We have been wondering that,” said one restructuring adviser.
In theory, finding the money to prop up the company by curing interest defaults should not be a problem for Musk. He is, after all, the world's richest (and most irritating) man and is set to earn US$56bn from Tesla if he meets targets at the electric carmaker, in which he retains a 14% stake valued at US$83bn.
However, even if Musk was willing – a big if – such a situation would not encourage buyers of the acquisition debt, making it more difficult for banks to shift their exposure.
“I don’t know structurally how that works, to constantly be curing with equity dollars. Other than avoiding a payment default, it’s not good for the holders of the debt. So, they may have to restructure to PIK the interest,” said the second banker. Payment-in-kind interest may take many forms, including adding owed interest to the debt’s principal.
Another option is that Musk buys the debt at discounted prices. The bankers said their institutions would be highly unlikely to accept that and that such a move would blow up their relationships. But the head of one restructuring advisory firm said it was possible. “Clearly it allows him to reduce his all-in price but the alternative is worse for the banks,” he said. “On some of the other recent LBOs where the underwriting banks needed to sell [at] a sizeable discount the LBO sponsors were big buyers – essentially doing the same thing.”
It is also possible that the banks might deem it profitable in the long term to swallow their losses without too much rancour, the first banker said. They could still generate fees by managing Musk’s personal holdings and doing deals for his other major ventures, Tesla and SpaceX.
Musk could loan the company his own money ensuring such facilities were senior to other lenders. But to force the issue Musk may instead claim the loss-making business simply cannot meet its liabilities and file for Chapter 11 bankruptcy protection from its creditors.
He could then put in a debtor-in-possession facility super-senior to pre-filing debts and take back control after reaching agreement with other creditors to cut their claims, or swap them for minority equity stakes.
Such a strategy would be high risk and would have to be sanctioned by a bankruptcy court. It might also be contested vigorously by creditors.
What does seem certain, though, is that banks will work very hard to avoid becoming the owners of Twitter; they are not in the business of running a controversial social media company. “A debt-to-equity swap with the banks won’t happen, they don’t want the liability,” the third banker said. “The banks might recut the debt before they try to shift it.” Such a move could involve shifting loans from their current term loan B structure to term loan A. They would then sell to institutional investors, taking whatever losses were necessary in the process.
“Banks owning the risk versus institutional investors owning the risk are two different things. Institutional investors will do a DIP,” said the second banker. "There would be a bankruptcy and restructuring."
Additional reporting by Michelle Sierra, Eleanor Duncan and Philip Scipio