Musk's Twitter Buyout Gambit Gets Costlier Each Day: Bloomberg

If Elon Musk really does go through with his acquisition of Twitter Inc., the social media giant will face an annual interest burden of nearly $1.2 billion on its debt - a problem that’s only going to get worse as rates continue to rise, Paula Seligson reported for Bloomberg News.

Photo Insert: Musk is taking a page from the usual private equity playbook by saddling Twitter with debt to help fund his acquisition of the company.

Roughly half of the $13 billion debt Musk is loading on Twitter is floating rate, meaning interest costs will increase as the Federal Reserve continues to raise rates. The Fed is expected to hike rates again next month, possibly by as much as 75 basis points in a fight to tame inflation.

Twitter now faces an annual interest burden of nearly $1.2 billion, up from an estimated $900 million in May, said Jordan Chalfin, a senior analyst at credit research firm CreditSights.

The Musk buyout may still be scuppered if the investors he had tapped would simply walk away.

That’s because the $6.5 billion loan portion of the financing, which banks may have to fund themselves, is structured as a margin over a benchmark rate that changes over time. In addition, Twitter is unlikely to be able to sell the debt to investors below the maximum interest rates banks had promised because credit markets have deteriorated so much since the deal was inked, Chalfin added.

Twitter’s current interest expense is less than $100 million per year, Chalfin said. Its debt includes two outstanding junk bonds worth about $1.7 billion total, plus some convertible notes.

Musk is taking a page from the usual private equity playbook by saddling Twitter with debt to help fund his acquisition of the company. Private equity firms usually then aggressively cut costs to increase earnings.

The higher interest burden means Twitter has an even smaller margin for error, Chalfin said.

“The goal for Twitter is to increase revenues and expand margins so that they can grow into their capital structure,” he said. The leveraged loan’s coupon is based off of the Secured Overnight Financing Rate (SOFR), and if banks fund the debt it would be at an interest rate of 4.75% over SOFR, according to an April SEC filing.

The one-month term version of this benchmark, which is commonly used in corporate lending, has increased by nearly 3 percentage points since Musk announced the acquisition in April, and is closely related to the Fed’s interest rate. Benchmark SOFR rate rose significantly throughout 2022.

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