Hey, the $44 billion buyout of Twitter could happen!
Or Twitter might be right in its concern the olive branch of Elon Musk and his team is actually “an attempt to delay a process,” as our Due Diligence colleagues reported yesterday.
It will be interesting to see how this deal is made when it actually closes. As a couple of all outlets have reported that this $44 billion deal creates $13 billion in issuance size (including the revolving credit line) for the seven banks undertook to finance the transaction with debt capital: Morgan Stanley is leading the transaction and is being accompanied by Bank of America, Barclays, MUFG, BNP Paribas, Mizuho and SocGen.
In case anyone forgot, interest rates are rising. While this in theory supports demand for adjustable rate leveraged loans, it also makes these loans less affordable for borrowers. CreditSights offers a nice rundown of the cost of this mega deal in a note dated October 4th:
The deal was revived much to the chagrin of investment banks, who are on the hook over the promised funding. The total funding is . . . approximately 10x Ebitda based on 2023 consensus estimates. While Twitter is expected to have ~183M free cash flow in 2023 based on street estimates, this does not reflect the cap structure of the LBO.
We estimate annual interest expense to be approximately $1.3 billion based on the terms in the debt acceptance letter versus less than $100 million for the existing cap structure. As such, we believe Twitter may not be FCF+ until 2025, and it would take both strong revenue growth and significant margin expansion to get there. If true, this could be a difficult syndication for the banks and we’ll be keeping an eye out for details on when and how the company intends to commercialize the new financing.
TLDR: That’s a lot of new possibilities. For example more than 10 times your interest costs before closing. And it could leave Twitter with a debt of 10 times its Ebitda, which is four rounds more than that limits set by regulators (first as a rule, then as a suggestion) after the financial crisis.
In other words, bankers will have to do even more to turn the tide lever ratchet slightly further as friction (Fed funds rate) is expected to rise (up over 4 percent by year-end 2023).
Today’s Twitter bondholders should be faring a lot better. The company’s current bonds are protected against a change of control. In short, Twitter must offer to buy back its bonds at 101 percent of par if the company changes hands and its credit rating is downgraded.
Now these bonds also offer a make-whole call. But our knowledgeable readers will point out that whole bond payouts are discounted with a spread to government bond yields, which have risen quite a bit over the past year, with a floor at face value.
On May 16, CreditSights calculated that the total payouts would cost a whopping $105 million more than the 101 buyout. The 10-year yield at the time was 2.9 percent. Today, with the benchmark trading around 3.8 percent, the change-of-control put might look like a relatively good deal.
Things aren’t looking so good for future potential Twitter creditors. Just weeks ago, a handful of banks took a dip after failing to pay down debt related to Elliott’s acquisition of Citrix. On the plus side, Musk’s deal at least offers an interesting benefit to some more opportunistic creditors.
Anyone freaking out about Elon Musk owning Twitter, relax. In 18 months, the creditors of the second lien will own it.
— Robert Smith (@BondHack) October 5, 2022
https://www.ft.com/content/ef12b153-7304-49ac-b735-0584204918fa Twitter: what’s next? | financial times