Twitter credit faces a 'multiple-notch' downgrade as Musk's buyout leads to significant spike in debt.
S&P Global Ratings believes Musk's controlling ownership will be a 'negative factor' in its management and governance assessment
Twitter Inc.'s deal to be acquired by Elon Musk will lead to a big increase in the social-media company's debt burden, which S&P Global Ratings believes will lead to a "multiple-notch" credit rating downgrade.
As part of the $44 billion deal announced Monday, Tesla Inc. $(TSLA)$ "Technoking" Musk said he had secured $25.5 billion of debt and margin loan financing, and is providing and equity commitment of $21.0 billion.
S&P said late Monday that Musk's buyout bid includes $13 billion in new debt financing issued by the company and a $12.5 billion margin loan against $62.5 billion of Tesla shares, which will cause Twitter's leverage to "spike significantly" above levels associated with the current BB+ rating.
A BB+ rating is S&P's highest noninvestment grade, or "junk," rating.
The rating agency said that while it plans to gather more information about the margin loan, it's possible that it will be consolidated in Twitter's capital structure and credit metrics. Currently, Twitter 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," S&P said. "The transaction would likely result in a multiple-notch downgrade of the issuer credit rating, likely no higher than the 'B' category."
The highest B-category rating of B+ would imply a three-notch downgrade from the current rating.
S&P said the acquisition by Musk also increases risks and uncertainty regarding potential changes in strategy, management and governance. S&P said that it doesn't currently have sufficient information on whether the equity component of the proposed financing will give Musk economic or voting control of Twitter.
"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," S&P said.
Meanwhile, Moody's Investors Service placed its Ba2 rating on Twitter's credit on review for downgrade on Tuesday. Moody's Ba2 rating is the second-highest "junk" rating.
Moody's said that not only will the new debt associated with Musk's bid result in a "material weakening" of credit metrics, it is likely that the deal would also "materially reduce" the amount of cash Twitter has on hand, as that cash is used to help fund the deal.
In addition to the increased debt burden and reduced cash, Moody's said Twitter also faces "potential legislative changes to third-party content liability protection and data privacy laws that could hurt its business."
Twitter's stock has dropped 24.7% over the past 12 months, while shares of fellow social-media company Meta Platforms Inc. (FB), which is the parent of Facebook, have tumbled 39.4%. In comparison, the S&P 500 index has gained 0.6% the past year.
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