Elon Musk/Twitter: Messy finances raise prospect of bankruptcy
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If Elon Musk’s impromptu financial statements are accurate, Twitter’s creditors should brace themselves for a potential default. On Tuesday, the billionaire entrepreneur made an impromptu appearance on the platform’s live audio service and told listeners the situation was “not good.”
Musk slipped into the sparser role, saying Twitter’s outflows ahead of his cost cuts next year would reach $6.5 billion, including interest payments. Its forecast of $3 billion in revenue and $1 billion in cash left Twitter less than a year before it had to raise more money or risk defaulting on payments.
Downsizing will reduce attrition, although severance payments will eat up savings. Musk has cut half the workforce. Others have left voluntarily and workers must come up with $1 billion in infrastructure savings. If he can halve the cost, Musk can push the sticking point forward to early 2024.
Of course, costs can increase and negate this benefit. Twitter is $12.5 billion in debt as a result of Musk’s leveraged buyout, resulting in $1.5 billion in annual debt servicing costs. Twitter pays a staggering interest rate of around 12 percent. This is partly due to rising interest rates, but is also a sign of the high level of risk perceived by lenders. Intangible assets and short-term investments make up a large portion of Twitter’s assets. Most debts are unsecured.
The banks still seem to have underestimated the problems ahead. The company hasn’t reported an annual profit since 2019. But at least sales were growing before Musk came along. It’s now forecasting a 40 percent decline from 2021, the last full year of results before the acquisition. The decline reflects a worse advertiser exodus than its competitors have experienced. S&P Global expects social media competitor Snap to report revenue growth of 23 percent over the same period.
This is Musk’s fault. Advertisers are unhappy that its relaxation of moderation has increased the risk of ads appearing alongside obnoxious content.
Investors, including Musk, could lose their equity. Filing for Chapter 11 bankruptcy would allow the company to reorganize and even raise new funds to support its ambitious Super App plans. But creditors would have to agree. They could also take control of the company.
Musk may choose to buy the debt himself. But if banks outsource it elsewhere, Twitter could end up in the hands of distressed debt funds. From the frying pan to the fire with a simple movement.
