S&P Global Ratings overnight placed its Twitter Inc. ratings on CreditWatch with a negative outlook after the social-media platform accepted a $44 billion takeover bid from Elon Musk that represents one of the largest leveraged buyouts on record.
The April 25 revision applies to Twitter’s issuer and senior unsecured note ratings, both of which stand at BB+ but are under threat from the debt- and equity-backed deal, which Ratings expects will push Twitter’s leverage well beyond the 1.5x downgrade threshold for the rating.
“We expect to resolve the CreditWatch placement, which could result in a multiple notch downgrade of the company and its debt, once the proposed acquisition closes and we can assess Twitter’s capital structure, operating strategy, and governance as a private entity,” Ratings analyst Scott Zari wrote in his report.
The proposed transaction includes $13 billion in new debt financing issued by the company and a $12.5 billion margin loan against $62.5 billion of Tesla Inc. shares. In an April 20 regulatory filing, Musk disclosed that a group of banks led by Morgan Stanley has committed to providing a $6.5 billion senior secured loan facility, a $500 million senior secured revolver, and up to $3 billion each of senior secured and unsecured bridge financing.
Twitter currently has around $5.29 billion outstanding of unsecured debt, which would take the biggest hit in a downgrade scenario if it is not redeemed as part of the buyout. That includes the borrower’s $700 million debut offering of 3.875% notes due 2027, issued in December 2019 with a change-of-control put option at 101. Those bonds have been trading lightly as the hostile takeover progressed, advancing just over 2 points on odd-lot trades this morning to 99.5, after bottoming out around 95.5 on April 12. The borrower’s February print of 5% senior notes due 2030 was up 2.375 points on the day and 5.25 on the week, at 104, from April 11 trades with a 97 handle.
“We plan to gather more information on the details of the margin loan, but it is possible that we will consolidate the loan in Twitter’s capital structure and credit metrics,” Ratings’ Zari wrote, adding that Twitter’s leverage will likely tip the ratings scale even without the margin loan and lead to a rating “no higher than the ‘B’ category.”
The agency also will have to take into account details of the $21 billion equity component of the deal as they emerge. Musk said in the April 22 filing that he was exploring a tender offer to purchase shares of Twitter directly from shareholders and a number of private equity firms are said to be interested in participating in the buyout, including Apollo Global Management and Thoma Bravo.
Twitter plans to release its first quarter fiscal year 2022 results before the market open on April 28, but will not hold an analyst call in light of the pending buyout.
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