Is Elon Musk’s Twitter in too much trouble to cover its debts? | Twitter

Elon Musk sold a statue of Twitter’s bird logo last week for $100,000 – and he needs the money. The social media platform that he owns reportedly faces an interest payment of about $300m (£242m) on its debt this week, amid difficult financial conditions for the company.

Twitter has been a loss-making business, even in the good times, but its problems have worsened since it was bought by the Tesla chief executive less than three months ago. Musk himself has raised the spectre of Twitter entering chapter 11 bankruptcy, although he has since played that prospect down. How much trouble is Twitter in, months after it was bought by the world’s second richest man?

How much money must Twitter pay banks next week?

According to reports, the first quarterly payment on the $13bn worth of debt used by Musk to buy Twitter must be paid by the end of the month. Analysts put the amount at approximately $300m, or a quarter of the estimated $1.2bn in annual interest payments due.

The debt, which sits on Twitter’s balance sheet and is loaned by a consortium of banks led by Morgan Stanley, comprises: a $6.5bn senior secured term loan facility (a bank loan); a $3bn senior secured bridge loan facility (a loan to tide over the company post-acquisition that, conventionally, is paid off with the proceeds of a bond issue); and a $3bn senior unsecured bridge loan facility. Twitter also has a $500m senior secured revolving facility, which is effectively a corporate overdraft.

Can Twitter afford the $300m payment?

Musk warned soon after taking over Twitter that the company could go bankrupt. He also revealed a sharp drop in advertising revenue, which accounts for 90% of Twitter’s turnover, caused by clients’ concern over moderation standards post-takeover and a botched relaunch of Twitter’s subscription service, which led to a rash of fake “verified” corporate accounts.

The advertising situation has not improved. It was reported last week that Twitter’s daily revenue has slumped by 40%. Its cashflow – a proxy of its ability to meet debt payments – is poor and in 2021 it generated negative free cashflow (spending more cash to run the business than it takes in) of $370.4m. Musk had warned that figure was heading towards $3bn this year but he now expects it to break even.

Musk told a podcast last month that Twitter is “not on the fast lane to bankruptcy any more”. He has also said Twitter has a net cash position of $1bn, which would at least cover next week’s payment along with the $500m overdraft.

“Twitter should have no problem making its interest payment in late January, which could be funded with cash on hand or its revolving credit facility,” says Jordan Chalfin, a senior analyst at the credit research firm CreditSights. “Longer term, the company needs to turn around the business, particularly its advertising revenue, in order to service its debt.”

Can Musk fund Twitter from his personal fortune?

To buy Twitter, Musk put in more than $20bn of his own money, alongside $7.1bn from associates and about $4bn from his existing stake in the company. Last year, he sold $23bn worth of shares in Tesla, presumably to fund his part of the deal. More than 60% of Musk’s remaining stake in Tesla has been pledged “to secure certain personal indebtedness”, which leaves him with about $67bn worth of shares he can sell immediately, says Ben Silverman, director of research at VerityData.

Musk therefore has the means to support Twitter financially, if he wishes. However, he said in December, not for the first time, that he was not planning to sell more Tesla shares. “I won’t sell stock until, I don’t know, probably two years from now. Definitely not next year under any circumstances and probably not the year thereafter,” Musk said.

Is bankruptcy or restructuring the debt an option?

If Musk defaults on an interest payment, Twitter could enter chapter 11 bankruptcy proceedings, where a company is sheltered from creditors temporarily while it attempts to restructure its finances. This would put Musk’s entire equity investment, and the billions put in by his associates, at risk. Another option would be to renegotiate the debt.

“When the banks look at Musk, they are looking beyond just Twitter,” says Brian Quinn, a professor at Boston College law school. “They are also looking at potential future business with Tesla, SpaceX. They may decide that it’s worth it to them to take 50 cents on the dollar in order to keep open the possibility of future business with Twitter and the rest of the Musk universe.”

However, banks could seek a stake in Twitter as part of any restructuring, which would dilute Musk’s control. In the long term, Musk has to get advertisers back, or rapidly increase subscriptions to Twitters’ premium product, Blue, in order to avoid humbling options.