Elon Musk wants to raise $3 billion to solve Twitter's debt woes
Since December 2022, Elon Musk and his team are looking for potential investors who can help raise $3 billion at Twitter and shave off a significant chunk of a high-interest loan at the social media company, The Wall Street Journal reported. The valuation of Twitter has been a hurdle, though.
Even though Elon Musk was the world's richest person at the time of his $44 billion bid for Twitter, the Tesla CEO sought a loan to acquire the social media company. Interesting Engineering has previously reported that Musk's acquisition has put an additional burden on Twitter's finances as it now needs to pay out over a billion dollars in interest alone every year.
Now Musk is looking to restructure the loan to reduce the burden of payments estimated to cost $3.42 million a day. For this, his team has approached current as well as potential investors of Twitter, but market conditions have not helped their case.
Musk's cost-cutting ways
Soon after taking over Twitter, Musk announced a massive round of lay-offs which hasn't ended so far. As per the WSJ report, the number of employees fired hovers near the 6,000 people mark, leaving barely 1,500 people in the company across all its offices on various continents.
In addition to auctioning off office supplies and furniture to raise more money, Musk has stopped paying rent for multiple offices and fired janitorial staff to save money at the company.
All this has allegedly helped Twitter as Musk said that the company was no longer in the fast lane to bankruptcy. However, the real reasons for Twitter's problems lie elsewhere.
Twitter's money woes
Since Musk became CEO, as many as 500 advertisers have paused advertising on the platform in light of the new CEO's controversial decision to bring back people who were previously banned from the platform, this has led to a revenue loss of approximately $4 million a day, Gizmodo reported.
Twitter's high payouts that are now due starting this quarter actually stem from how Musk raised money to finance his purchase. According to the WSJ report, Musk raised $13 billion in debt from banks, out of which $3 billion is an unsecured bridge loan.
This is financial terminology for a short-term loan intended to be paid out quickly or secured with another financing. These are high-risk money lends and therefore attract the highest rate of interest as well.
In Twitter's case, the $3 billion attracts a 10 percent interest plus secured overnight financing rate, currently at 4.3 percent. As per the terms agreed with the bank, for every quarter the loan remains unsecured, the interest rate goes up by 0.5 percent.
Last April, when Musk first announced his intent to buy out Twitter, the overnight rate was a meager 0.3 percent. In less than a year, it has shot up by four percent, and if Musk cannot secure it anytime soon, it is likely to go further up, possibly explaining why Musk tweeted this last month.
At risk of stating obvious, beware of debt in turbulent macroeconomic conditions, especially when Fed keeps raising rates— Mr. Tweet (@elonmusk) December 13, 2022
The pain of the unsecured loan becomes even more evident when considering that a $6.5 billion term loan attracts only a 4.75 percent interest rate. In comparison, a $3 billion secured bridge loan carries a 6.5 percent interest.
As per the WSJ report, Musk and his team are looking to sell shares of the now-private Twitter to secure the bridge loan. However, they intend to raise the money at the $44 billion valuation that Musk paid for Twitter; some have been things investors do not agree upon under current market conditions.
Musk has denied that he is looking to secure the bridge loan by selling his Twitter shares but with payments due soon, something or someone will soon have to give in.