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25 November 2022

Is Elon Musk too rich to fail?

Twitter is $13bn in debt and losing revenue, but for the world's richest man even failure can have an upside.

By Will Dunn

From the moment he arrived, carrying a large porcelain sink bought solely in order to make a weak pun, Elon Musk has been treating Twitter as if it’s just about to go out of business. He has cut thousands of jobs and led hundreds more people to resign rather than sign up to an “extremely hardcore” schedule of “long hours at high intensity”; he has stopped paying vendors and made hasty alterations to the product that have reportedly led clients to suspend their advertising. 

Musk himself has warned staff that the company could file for bankruptcy if revenues do not improve, but his plan to generate revenue through subscriptions doesn’t seem to have had the greatest start. Even if millions of people are prepared to pay $8 a month to buy limited clout on the internet (and to be publicly identified as having done so), anything from 15 per cent to 30 per cent of the money generated through a subscription on the Twitter app will go to Apple or Google. All of this is taking place in the early stages of what many economists think will be a historic global downturn.

All of which might sound a bit risky, even for the world’s richest man (as measured by financial assets). But remain calm – chances are, he’ll be OK. Billionaire money and normal money are like quantum physics and classical physics: they’re technically the same system, but they seem to follow very different rules. 

One great example of this is the debt that Musk used to buy Twitter. Musk paid for the company with (roughly) $27bn of his own money, $5bn from equity investors and $13bn in loans. The last part is the most important, because it’s now a huge weight on Twitter’s finances: the company will have to pay an estimated $1.2bn in interest to banks over the next year.

The thing is, banks don’t want to keep this debt. They want to sell it, because this is how they make money from financing corporate takeovers (known as leveraged buyouts, or LBOs): they lend someone money to buy a company, then package the debt up as bonds and sell it at a profit.

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But what if no one wants to buy the debt? This appears to be the case with Twitter: investors reportedly won’t offer more than 60 cents for a dollar of Twitter’s debt, and this number could fall still further now that the company’s credit rating has been downgraded and then withdrawn. The people who buy corporate debt after an LBO typically do so because the new owner has a clear strategy to turn the company around, but in the case of Twitter, as Changpeng Zhao, CEO of the crypto exchange Binance, commented after his company committed $500m to the deal as an equity investor: “There isn’t, like, a business plan.”

This is also happening at a time when banks are already trying to shift a backlog of tens of billions in “hung” debt after a surge in deal-making over the past couple of years. Debt in any company is now much harder to sell.

There is, however, one person who could be interested in buying Twitter’s troubled debt: Elon Musk. In theory, he could repurchase Twitter’s debt himself, and take greater ownership of the company at a steep discount.

Some readers may at this point be wondering if they should pop down to the bank and offer to buy out their overdraft for half of what it’s worth. Best of luck with that!

For companies, however, repurchasing debt at a discount is both possible and normal. Earlier this month, for example, the embattled Swiss bank Credit Suisse announced that market conditions would allow it to repurchase around $3bn of its own debt “at attractive prices”. 

Nor is there any regulatory issue with doing this, as long as the market is properly informed about the company’s financial position, which is why debt repurchasing typically happens after an earnings report – and few companies’ finances are currently more public than Twitter’s. 

Anyone with the means to make this kind of deal may find the downturn in the corporate debt market is actually beneficial. I’m told that many owners and shareholders of companies are currently looking at repurchasing debt as economic conditions make it cheaper to do so. What’s more, banks don’t like to carry the poor decisions of one year into the next; it may be that the approaching year-end deadline persuades some to sell underperforming investments at a discount now. 

Musk hasn’t given any indication that he’s planning to do this, but it could make sense for him if he did. Buying back Twitter’s debt would relieve the company of its biggest financial problem, and reduce its dependence on advertisers. As a populist, he could perhaps spin the debt restructuring as a means of taking back control of Twitter from Wall Street. He might use it to give more of the company to his private backers, or even to give lots of little chunks of equity to retail investors and let them vote on changes to the platform.

So, Musk’s management of Twitter may look chaotic and risky, and indeed it is. But like an investment bank, the sheer amount of capital he commands means he is able to take risks that others can’t. The events of the next few months will pose an important question about Musk: is he a brilliant businessman, or does he now have so much wealth that the system will not let him lose?

[See also: Donald Trump is back on Twitter. Let freedom reign]

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