Elon Musk's "Global Sewer" May Derail Bankers' Trying To Finally Dump Toxic Twitter LBO Debt
Elon Musk totally screwed his bankers who foolishly funded his Twitter LBO. Big mistake. I show how Banks can take over control from Elon, Twitter goes into recovery, & banks begin to recoup losses.
Elon Musk is enraged that vital major advertisers have the gall to leave his toxic X platform, formerly known as Twitter TWTR 0.00%↑, rather than see their pricey ads landing next to waves of vile posts spreading pernicious disinformation and hate, including antisemitism, racism, misogyny, and more—much of which has been posted and/or endorsed by Elon Musk himself.
His response? Curse at them, live on stage yesterday at the New York Times Dealmaker Summit:
“Don’t advertise. If someone’s going to try to blackmail me with advertising, blackmail me with money, go f**k yourself.”
“Go. F**k. Yourself,” he repeated, arms waving. “Is that clear? I hope it is.”
Sure, we get it. “Back to ya, babe. Ta ta,” I imagined advertisers responding coolly.
What I also heard was Musk simultaneously hurling the same invective at his feckless bankers, led by Morgan Stanley MS 0.00%↑, Bank of America BAC 0.00%↑, and Barclays BAC 0.00%↑, who had been foolish to loan him more than $13 billion to finance his $44 billion LBO of Twitter just over a year ago.
As I warned then,
I think the banks will likely be stuck with billions in bonds few want to buy in a troubled market, issued by a soon-to-be even more dicey company taken private by one of the worst CEOs running billion-dollar companies today.
Stuck they were. The Twitter LBO became the biggest “hung debt” buyout deal ever, leaving the banks on the hook for more than 30% of all hung debt held by banks in the US and Europe by the end of 2022 (see Twitter’s Banks Are Stuck With Largest Chunk Of Unsold LBO Debt, 11/29/22).
The toxicity of Twitter’s debt is much worse as we approach the end of year two since the LBO closed. That’s because, as I predicted, Musk has aggressively destroyed Twitter from the top down (see Elon Musk Doesn't Want You To Get Too Attached To Twitter's New CEO, 6/15/23, and Elon Musk's Latest X-Ceptionally Bad Idea, 7/26/23).
Paris mayor Anne Hidalgo summed it up on Monday, saying she is leaving Twitter because Elon Musk has turned the platform into a “gigantic global sewer” that has “become an impressive tool for destroying our democracies.” She continued:
Whether it be manipulation, disinformation, the fostering of hatred, harassment, anti-Semitism and open racism, or vicious attacks on scientists, climatologists, women, environmentalists, liberals and all those of good will who wish to engage in peaceful political debate in an increasingly complex world, the range of abuses is endless. Not to mention the daily external meddling in electoral processes, aimed at destabilizing our democracies and undermining their image and sovereignty.
Ann Hidalgo, Mayor of Paris
She’s not wrong. Elon Musk started his latest month of chaos by inflaming hatemongers, again, when he endorsed an antisemitic post by a noted white supremacist who accused Jewish communities of “hatred against Whites” and sending “hordes of minorities” to replace whites, among other hateful tropes. Musk answered the post with “You have said the actual truth.” This came on the heels of the bloody Hamas attack on Israel which set off another brutal war.
The onset of the war revealed Twitter’s tragic demise as a formerly reliable up-to-the-minute source of breaking news. This time, fake news and disinformation proliferated via Twitter feed algorithms while actual news sources were deliberately suppressed. Abrupt changes Musk has made to Twitter included stripping headlines and story descriptions from actual news stories to make them less recognizable as legitimate sources. He told users to rely instead on Twitter contributors to get news and pushed two anonymous accounts known as notorious hatemongers already reported for spreading misinformation—he quietly deleted his post.
All this has compounded Twitter’s already rapid descent as hate speech and disinformation have surged with him at the helm, much of it coming from “verified” users—who also are now monetized by Twitter—along with Elon Musk who has directed its degradation.
Waves of its largest advertisers have again paused ad spending and even stopped posting on Twitter. The White House and the European Union have denounced Elon Musk personally for his incendiary posts and the flood of related hate speech and “illegal content and disinformation” they inspired.
As is typical, Elon Musk has responded by suing media trends trackers, who warned about risks to advertisers from spiking hateful content on Twitter, and by threatening his critics:
Your Move, Bankers
Elon Musk has destroyed Twitter as a platform and, increasingly likely, as a going concern. He may potentially lose control of Twitter’s ultimate future as a result.
As recently as last month, rumors were circulating that its lead banks were planning to dump at least some of Twitter’s LBO debt, according to The Wall Street Journal:
The banks currently expect to take a hit of at least 15%, or roughly $2 billion, when they sell the debt, people familiar with the matter said. That would mean hundreds of millions in losses for those holding the largest pieces, which include Morgan Stanley, Bank of America, Barclays and MUFG.
While $2 billion certainly is a hefty hit, I thought at the time the estimated 15% haircut seemed too generous, as if the banks were simply adjusting for the negative impact from rising interest rates—ignoring the massive destruction since then in Twitter’s credit quality and prospects.
But I doubt the bankers can find sufficient willing suckers…uh…buyers for Twitter debt even at 17-20% coupons. Elon Musk has not only killed Twitter and its ability to service any debt, but he’s also thoroughly debauched the most powerful bankers in the world who, ignoring all good sense, loaned him $12.5 billion to fund an LBO Twitter couldn’t afford from day one (see Twitter: Take The Money and Run, 4/26/22). He has wiped out more than $7 billion in equity invested by some of his closest and richest friends to help him close the deal.
Who now would be stupid enough to buy unregistered, illiquid, and likely immediately impaired if not near worthless debt sold by these hair-on-fire bankers, issued by Twitter, and controlled by Elon Musk?
No wonder the banks have been trying since last year to dump this debt (see Elon Sold More Falling Tesla Stock. Margin Calls? Twitter Failing? Bank Demands? Likely All Three, 12/18/22).
Those talks and every other round since then failed. Why? I suspect because the banks had no power to force Elon Musk to do anything as long as Twitter continued to supply monthly financials as required and pay interest due as agreed. If there was some viable legal remedy the banks could use to escape the disastrous financial contract with Elon Musk that keeps them locked into supporting and holding Twitter’s toxic LBO debt, they certainly would have pursued it long before their losses swelled to more than $2 billion. Clearly, they’ve been stuck.
Until now, perhaps, because Twitter may have run out of cash, credit line capacity, and rich, gullible friends.
Twitter’s financials are nonpublic, but I speculated last year that this was bound to happen. I estimated the company used whatever was left of the $6 billion in cash it reported at the end of June 2022 to retire the company's $5.29 billion in existing bonds. Already a substantial user of cash before the deal closed, I suspect Twitter’s operations have remained cash flow negative as plummeting revenue down by 60% or more—90% of which was ad-driven—still fails substantially to cover even costs slashed to the bone and beyond (see Elon Sold More Falling Tesla Stock. Margin Calls? Twitter Failing? Bank Demands? Likely All Three, 12/18/22).
With the company still burning cash and $1.3-1.5 billion in annual interest due over the past year, I had expected Twitter to live on borrowed time: a meager $500 million revolving credit line plus a potential $1.7 billion accordion expansion (see Elon Is "Saving" Twitter To Death, 11/28/22).
The year is over, so Twitter’s cash may be nearly if not already dried up—along with Elon Musk’s options.
Elon Musk is the richest man on the planet, but he’s also cash-poor. He could sell more Tesla TSLA 0.00%↑ stock, but he is limited on how much given his substantial margin loans. He could borrow, again, from SpaceX—as he did to fund his $1 billion cash gap to close the LBO (a revelation out only a couple of months ago). I still expect him to siphon funds from Tesla, likely via an obscure unrestricted subsidiary to hide the cash drain from Tesla investors (see Elon Is "Saving" Twitter To Death, 11/28/22, and Elon Musk gambled big on Twitter. Tesla is going to pay the price, 12/5/22).
Whatever he does, he will probably have to keep doing it for years until Twitter’s debt is repaid: at least $14.7 billion. This seems unlikely.
I think Musk knows this, which is why he has become particularly unhinged—much as he was in the summer of 2018 when, as he admitted much later, Tesla was “weeks away from death” (see Great Magic Trick Tesla; Now Do It Again, 11/28/18).
He admitted as much yesterday, in the middle of his vulgar rant against the accursed advertisers who dared to leave Twitter rather than let him destroy their brands too:
Elon Musk: Actually, what this advertising boycott is going to do, it’s going to kill the company. And the whole world will know that those advertisers killed the company. And we will document it in great detail.
Andrew Ross Sorkin: Those advertisers, I imagine, are going to say, “we didn’t kill the company. They’re going to say to you, Elon, that you killed the company. Because you say these things, and they were inappropriate things, and they didn’t feel comfortable on the platform.
Elon Musk: And let’s see how Earth responds to that.
Earth to Elon: It is all your fault. You control Twitter completely. You post and incite harmful speech, and you have been actively curating a like-minded user population that destroys brand safety for the very advertisers you need the most to keep Twitter alive. These are the consequences you have created, and Twitter stakeholders have suffered as a result, as you do not.
Twitter may soon arrive at its reckoning. No cash, no willing lenders, no prospects, no more time.
If so, this could mean bankruptcy—and possibly Twitter’s best hope:
Equity was rendered worthless almost as soon as Elon Musk bought it. Wiped out. Gone. In bankruptcy, there goes Elon Musk’s absolute control and influence. He’s not likely to be able to buy out enough of Twitter’s debt to retain control in the restructuring—because the banks hold it all. He’s out.
The banks will own Twitter. The banks will be in charge of its future—and they are down substantially more than $2 billion so they have a clear objective for Twitter to continue as a going concern and start making money as soon as possible.
With Musk gone, Twitter suddenly has a promising future as a turnaround. The path to recovery is surprisingly simple to conceive, if not execute: reverse most everything Elon Musk has done. This means new management must restore strong content oversight and drop previously banned and current contributors, especially Elon Musk, who violate comprehensively defined TOS and threaten brand safety for lucrative advertisers. Consistent and legitimate content moderation is never easy, but it must unquestionably exist.
If the banks can accept a substantially pared-down (or even eliminated?) debt structure in favor of equity in the surviving entity, Twitter can have a more credible chance at viability with a clean slate of astute management.
I don’t think I’m being sentimental, or too optimistic. The fact that so many lucrative advertisers and core, non-wacko/racist/antiemetic/misogynist/homophobic/generally hateful users are or were, until recently, still on Twitter despite all the destruction Elon Musk has done to it over the past year, tells me the platform can flourish if management can stop trying to murder it. Every. Single. Day.
Stay tuned.
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Question: If we make the not unreasonable assumption that the Twitter LBO debt is worthless, is there any incentive for the banks to recognize this now rather than kicking the can down the road? I guess (?) the banks don't act until the interest payments dry up. Banks being banks, I imagine the Twitter paper is recognized on the books at full value despite it being deeply impaired.