How Twitter’s ‘Huge’ Revenue Drop Adds to Firm’s Heavy Debt Load

Elon Musk’s revelation that Twitter has seen a sharp drop in “revenues” since he took over more than 10 days ago underscores the social media company’s dire financial situation after borrowing $13 billion (roughly Rs. 105 crore) in debt, credit experts said. . .

Musk tweeted on Friday that Twitter was losing more than $4 million (roughly Rs. 33 crore) a day, mostly because advertisers started fleeing when he took over. He accused civil rights activists of pressuring advertisers, although many in the advertising industry said his tweets contributed to the spread of conspiracy theories.

But even before the turmoil, Musk had launched a series of acquisitions that pushed the San Francisco-based company’s finances over the edge.

Twitter faces interest payments of up to $1.2 billion (about Rs. 9,830 crore) over the next 12 months on the debt Musk has piled on, following a series of interest rate hikes by the Federal Reserve, analysis of financial terms revealed by regulatory filings.

The payments exceed Twitter’s recently disclosed cash flow, which reached $1.1 billion (about Rs. 9,010 crore) in late June, according to Twitter’s financial disclosure made before Musk took it private on October 27.

Some aspects of Twitter’s current financial health are uncertain, as the company has yet to disclose enough. It is not clear how much of Twitter’s debt of $5.29 billion (roughly Rs. 43,330 crore) before the acquisition is refinanced or stays with the company. It is also not clear how much of the $2.7 billion (roughly Rs. 22,120 crore) held by Twitter at the end of June should be kept private.

Debt investors and analysts say Musk needs to make sure the company is profitable enough to meet its debt payments or it will need cash infusions.

“Everage could rise to double digits unless Mr. Musk contributes more equity than previously thought or significantly improves profits,” S&P Global analysts wrote in a credit research note. They gave the company a “junk” B-minus rating.

Representatives for Twitter and Musk did not respond to requests for comment.

Musk and his co-investors collectively cut a check of more than $30 billion (roughly Rs. 24,580 crore) of their own money with the Twitter deal. That money could be at risk if Twitter needs a debt restructuring down the line.

Musk has begun a dramatic cost-cutting drive, laying off half of the company’s 7,400 employees. Overall, it is trying to achieve up to $1 billion (roughly Rs.8,190 crore) in annual infrastructure cost savings, including servers and cloud services. By 2021, Twitter had total revenue and expenses of $5.6 billion (roughly Rs. 4,590 crore).

Musk also revealed plans for a new subscription service that would include authentication of Twitter users and cost $8 (roughly Rs. 655) per month. If he can generate enough cash to diversify Twitter’s profits without alienating users, that could be a boon, credit analysts say.

Brand Advertising

In their letter, S&P analysts also said that the expected economic downturn will weigh on Twitter’s advertising profits next year. Musk said last week that Twitter is more vulnerable to advertising cuts than other social media platforms because most of it comes from product advertising, rather than direct-response advertising that involves interacting with consumers. Advertisers cut back on product advertising during peak periods.

Twitter’s problems are also a problem for the banks that support Musk’s acquisition, even if the company continues to meet its debt obligations, because they need to remove the debt from their books and sell them to investors. They have held onto it until now because high interest rates have made it unattractive to investors, and they will have to sell it at a discount. The collapse of Twitter’s business has the potential to turn what are currently hundreds of millions of dollars in bank losses into billions of dollars.

“It will be difficult to sell debt because business is expected to decline next year,” said Roberta Goss, Senior Managing Director at Pretium Partners, which invests in corporate debt.

© Thomson Reuters 2022