Elon Musk’s proposed takeover of Twitter would cause leverage to spike significantly above the 1.5x downgrade threshold associated with the ‘BB+’ issuer credit rating. 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. 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. Twitter currently only has about $5.29 billion of unsecured debt. Regardless of whether the margin loan is included in Twitter’s credit metrics, the amount of debt in the capital structure will increase significantly and leverage will be well above our 1.5x leverage threshold for the current rating. The transaction would likely result in a multiple-notch downgrade of the issuer credit rating, likely to no higher than the ‘B’ category.
The proposed capital structure is mostly secured debt, with only $3 billion being contemplated as unsecured financing. Given that there will be a substantial amount of secured debt with a higher claim in the capital structure, we expect to rate the unsecured debt lower than the issuer credit rating. We expect the existing senior unsecured debt to be redeemed as part of the transaction. However, if the existing unsecured debt is not redeemed, we would likely also lower the existing ‘BB+’ senior unsecured debt rating by multiple notches and would also rate it lower than the issuer credit rating.
The proposed transaction increases risks and uncertainty around potential changes in strategy, management, and governance. We currently do not have sufficient information on the equity component of the proposed financing to determine whether Musk will have economic or voting control of Twitter after the deal closes. The presence of additional outside equity investors would not preclude us from viewing the company as a controlled entity, especially if we view them as a consortium of equity investors that exercise control jointly. Typically, we view controlling ownership as a key governance risk because the controlling owner may place their interests above the interests of other stakeholders, including debtholders. Musk has also indicated that he could potentially use his control to implement changes in Twitter’s operating strategy. Our resolution of the CreditWatch would entail a review of any changes in the company’s strategy, governance, as well as board and voting rights composition. We would likely view the controlling ownership as a negative factor in our management and governance assessment of the new entity.
We expect to resolve the CreditWatch placement once the proposed acquisition closes and we can assess Twitter’s capital structure, operating strategy, and governance as a private entity. We believe it is likely that we will lower the issuer credit rating by multiple notches due to our expectation that leverage will be well above our 1.5x downgrade threshold. The existing debt will likely be redeemed as part of the transaction, but if it remains, we could lower our rating on that debt by multiple notches as well given our expectation that leverage will increase and there will be substantial secured debt with a higher ranking in the capital structure.