Twitter’s massive revenue drop adds to heavy debt burden
Experts claim that Elon Musk’s disclosure that Twitter’s income has dropped “massively” since he took control 10 days ago demonstrates the financial fragility of the social media firm, which he has burdened with $13 billion in debt.
On Friday, Musk stated that Twitter was losing over $4 million per day because advertisers had begun to leave the company after he took charge. He claims that pressure from civil rights activists is to blame, while many in the advertising sector point to his own tweets that promote conspiracies as a cause.
Nonetheless, before to this disruption, Musk had organised an acquisition that severely strained the San Francisco-based company’s resources.
According to a review of the financing arrangements revealed in regulatory filings, Twitter will be responsible for making interest payments on the debt Musk imposed on it reaching close to $1.2 billion in the next 12 months as a result of a series of interest rate rises by the Federal Reserve.
The sums paid out are more than the $1.1 billion in cash flow that Twitter reported at the end of June, per financial filings submitted by the company before Musk took it private on October 27.
Lack of transparency on Twitter’s part has left several questions unanswered about the company’s financial situation. It is unclear how much of Twitter’s pre-acquisition debt of $5.29 billion was refinanced or how much stayed with the firm. Twitter has $2.7 billion in cash as of June 30; it’s unclear how much of that will remain with the company when it goes private.
Analysts and investors in the business’s debt have warned Musk that if he doesn’t make sure it’s profitable enough to make its debt payments, the company would need a capital injection.
S&P Global analysts warned in a credit research note that “Leverage might surge into the double digits unless Mr. Musk invests much more stock than originally envisaged or dramatically improves profitability.” The firm has been deemed “junk” with a B-minus rating.
Representatives from Twitter and Musk did not reply to our requests for comment.
Musk and his partners put up over $30 billion of their own cash to buy into Twitter. If Twitter ever needed to restructure its debt, that sum of money would be at danger.
Musk has begun a massive cost-cutting initiative, laying off 3,200 of the company’s 7,400 workers. In all, he’s looking for ways to cut yearly spending on infrastructure by as much as $1 billion. This includes savings from server consolidation and the use of cloud computing. Total expenditures and expenses for Twitter in 2021 were $5.6 billion.
Musk has also described a $8 monthly membership service that would verify users’ identities on Twitter. Credit experts have praised his chances of success if he can increase Twitter’s income in a way that doesn’t turn off the service’s users.
Branding and advertising
S&P analysts noted in their report that Twitter’s advertising income for the next year will suffer due to the anticipated economic slowdown. Since most of Twitter’s revenue comes from brand advertising rather than direct-response advertising that includes connection with customers, Musk warned last week that the network is more susceptible to cutbacks in advertising than other social media platforms. When things are tight, the first thing advertisers do is cut is brand advertising.
Even if Twitter is able to keep up with its debt payments, the banks that financed Musk’s purchase are still at a disadvantage since they need to unload the debt onto investors. They’ve been holding on to it for so long because investors are less interested in it now that interest rates are rising and they’d have to lower their asking price to make a sale. If Twitter’s business were to decline, the banks’ present loss of hundreds of millions of dollars might balloon to billions.
It will be difficult to sell the debt because of the anticipated fall in activity next year, according to Roberta Goss, senior managing director at Pretium Partners LLC, an investment firm that purchases corporate debt.
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