The acquisition of Twitter Inc. is set to cost Elon Musk an estimated annual interest burden of $1.2 billion on the debt. This is expected to worsen with more rate hikes.
Nearly half of the $13 billion debt that Musk is putting on Twitter is on floating interest rates. It means that interest rates increase whenever Federal Reserve raises the rates. Next month the Fed is expected to again hike by 75 basis points in its fight to tame inflation.
According to a senior analyst at credit research firm CreditSights, the annual interest burden of Twitter is estimated to go up from $900 million to $1.2 billion. This is because the bank funds the $6.5 billion loan of the financing part at floating rates. Also, it is difficult for Twitter to sell the debt component to investors below the maximum rates promised by the bank as the credit market has deteriorated since the deal was agreed upon in April.
The current expense of Twitter on its interest outgo is less than $100 million annually. The debts include $1.7 billion worth of junk bonds and some convertible notes.
Musk is taking the usual route that Private Equity Firms take by putting debt on Twitter to help acquire the social media giant. PE firms usually cut costs to increase earnings.
According to an April filing with SEC, the loan coupon rate is linked to the Secured Overnight Financing Rate (SOFR), and if the bank funds the debt, it will be at interest rates of 4.75% above SOFR.
The SOFR benchmark used commonly in corporate lending is closing related to the Federal Reserve Interest rate. It has increased nearly 3 percent since Musk announced the Twitter deal in April.
The Twitter buyout also has a $6 billion junk bond, split into secured and unsecured tranches with fixed rates for investors. As per Bloomberg News, banks have committed a maximum coupon rate on this debt. The unsecured tranche can go up to a coupon rate of 11.75%.
The seven banks committed to providing the debt in April will not have the time to sell the loans and bonds to investors in case of the deal close by October 28. Banks also provide floating rate loans of $500 million, known as revolving credit facilities.
Cash Burn
Jordan Chalfin, a senior analyst at CreditSights, estimates Twitter to have a cash burn in the near future and might not give positive cash flow until 2025. He said that considering the deal being heavily leveraged, it would be challenging to syndicate the loan component to the market. If banks fund the Twitter deal, they will wait for the market to calm down and then try to sell bonds and loans to investors.
The ultimate backup is Musk, who, along with other backers, is providing $33.5 billion equity to fund the balance of the $44 billion deal. They will ensure that their massive investment is protected.
