Twitter’s “massive” revenue decline adds to its heavy debt burden
Musk said on Twitter on Friday that Twitter was losing more than $4 million a day, largely because advertisers began fleeing it after the takeover. He has accused civil rights activists of pressuring advertisers, although many in the ad industry say his tweets spreading conspiracy theories contributed.
Even before this shake-up, Musk had been preparing an acquisition that sent the San Francisco-based company’s finances into a tailspin.
Twitter faces approximately $1.2 billion in interest payments over the next 12 months. Musk’s debt increased after the Federal Reserve raised a series of interest rate hikes, the analysis shows, with financial terms disclosed in regulatory filings.
The payments are more than Twitter’s most recent cash flow of $1.1 billion at the end of June, according to Twitter’s financial statements filed before Musk took it private on Oct. 27.
Some aspects of Twitter’s current financial situation are unclear, as the company has not provided sufficient disclosures. It’s unclear how much of Twitter’s $5.29 billion in debt is or remains with the company until the acquisition is refinanced. It’s also unclear how much of the $2.7 billion in cash held at the end of June was retained after Twitter went private.
Investors and debt analysts said Musk needed to ensure the company was profitable enough to pay its debt payments or it would need a cash injection.
“Unless Mr. Musk brings in significantly more capital than expected or significantly improves profitability, leverage could hit double digits,” S&P Global analysts wrote in a credit research note. They gave the company a B-negative “junk” rating.
Representatives for Twitter and Musk did not respond to requests for comment.
Musk and his partners on Twitter checked in more than $30 billion of their own money for the deal. That money would be at risk if Twitter needed to restructure its debt.
Musk began cutting costs dramatically, laying off half of the company’s 7,400 employees. Overall, it seeks to find up to $1 billion in annual savings in infrastructure costs, including servers and cloud services. In 2021, Twitter’s total costs and expenses were $5.6 billion.
Musk also revealed plans for a new subscription service that would include Twitter user authentication and cost $8 a month. If it can generate enough revenue to diversify Twitter’s earnings without alienating users, credit analysts say, that would be fine.
BRAND ADVERTISING
S&P analysts also said in a note that the expected economic downturn will affect Twitter’s ad revenue next year. Musk said last week that Twitter is more vulnerable to ad interruptions than other social media platforms because most of them come from brand advertising rather than direct response advertising, which involves interacting with consumers. Advertisers primarily reduce brand advertising during lean times.
Twitter’s woes are also a problem for the banks backing Musk’s buyout, even as the company continues to default on its debt obligations as they are forced to sell debt off their books and sell it to investors. They have held onto it until now because rising interest rates have made it less attractive to investors and they will have to sell it at a discount. A deterioration in Twitter’s performance could turn hundreds of millions of dollars into billions of dollars in losses for banks right now.
“It will be difficult to sell debt because activity is expected to decline next year,” said Roberta Goss, managing director of Pretium Partners LLC, which invests in corporate debt.
