How to tell if Elon Musk's Twitter is winning? Watch the bonds.

The financing for Musk's controversial takeover of Twitter is the tell.
Things are going great.
Things are going great.
Photo: Handout (Reuters)
We may earn a commission from links on this page.

How are things going at Twitter after six weeks under Elon Musk’s management?

Not great, according to reporters who have seen advertisers balk at what independent researchers say is a surge in racist and antisemitic content on the site. That’s just fine, according to Musk, who says engagement with the site is rising, driven in part by Musk’s shaky attempts at content creation.

It makes you wish that Twitter was a public company that had to release audited financials and parade executives before stock market analysts. With those days passed, how can outsiders measure Twitter’s success?

The answer could be found in the take-up (or not) of debt issued by Twitter to finance Musk’s takeover. Twitter borrowed $13 billion as part of the $44 billion purchase price, with annual interest payments estimated at about $1.2 billion, which is more money than the company earned in 2021. That includes $6.5 billion worth of leveraged loans floating on rising overnight borrowing rates, $6 billion split between secured and unsecured junk bonds, and a $500 million revolving credit line to be funded by the banks.

Musk’s bankers are suffering

The banks that lent this money for Musk—a team of seven institutions led by Morgan Stanley and including Bank of America, Barclays, BNP Paribas, Mizuho Financial Group, Mitsubishi Financial Group and Societe Generale—got a very bad deal.

When Musk signed the agreement to buy Twitter in April, the bond market wasn’t hot, but it got a lot a worse during the six months that Musk got cold feet before he finally capitulated. As the Federal Reserve raises interest rates, the yield on the riskiest loans, like those to Twitter, has risen from 10.7% in April to 15.2% today. (There’s a reason Musk has suddenly started complaining about the Fed.)

Twitter’s $3 billion of unsecured junk bonds reportedly yield 11.75%, far less than what investors could obtain in the markets now. A month ago, Bloomberg reported that some hedge funds offered to buy the bonds for 60% of face value, a price that would force the banks to book hundreds of millions of dollars in losses. So the banks have been holding the loans on their own books instead of re-selling them to investors as planned.

Now, news has broken that Musk is seeking to replace the riskiest loans with money borrowed against his personal holdings of Tesla stock. That would relieve some of the burden on Twitter’s bottom line by shifting the risk to Musk, who would have to pay less interest because Tesla equity is seen as far more valuable than a low-level claim on Twitter’s cash flow.

Still, Tesla’s stock price has fallen by more than half over the year, and if Musk is forced to sell to meet margin requirements, it could further hurt the electric automaker’s market value or, in a worst case scenario for Musk, jeopardize his control of the company.

What will become of these bonds?

Investors expect that banks will wait to syndicate these bonds until Musk’s Twitter operation has stabilized; this week’s apparent firing of deputy general counsel Jim Baker and the still-changing plans for a new Twitter subscription service suggest we’re not there yet. But when it happens, bankers will have to write a series of disclosures about the state of the business that will give investors the best peek into its plans to make money.

And then we’ll see exactly how much the markets believe those plans if the bonds start to trade. Given the chaos at the company and the general state of the credit markets—and with the Fed set to raise interest rates again this month—they are unlikely to perform well. Twitter’s pre-Musk debt is actually trading close to par value, but that’s because creditors expect the company will be contractually obligated to buy it back thanks to the change in ownership.

The interest payments on these bonds, not Musk’s latest tweet, will be the best measure of Twitter as a going concern. Will the platform be able to generate the income to service them? Will Musk need to sell Tesla shares to fund them? Or is this deal headed back to court, this time as a bankruptcy?