Change of Control Event

A Change of Control Event under the SUNs requires two conditions to be met. First, a Change of Control (here, a person or group will become the beneficial owner of more than 50% of Twitter’s voting stock, triggering this limb). Second, there must be an accompanying ratings downgrade of the SUNs by each of Moody’s and S&P (during a specified period following public announcement of the intended Change of Control). While this ratings downgrade has not yet occurred, the changes to the capital structure and significant increase in leverage following the acquisition mean this limb is likely to be triggered.

Assuming, therefore, a Change of Control Event will occur, Twitter would be required to offer to repurchase the outstanding SUNs at 101%, unless it otherwise optionally redeems them.

Refinancing the SUNs

A condition to the availability of Musk’s new debt financing is the refinancing of Twitter’s existing RCF and the SUNs (see the Commitment Letter filed with the SEC on 20 April here, in particular condition 4 of Exhibit E). Both series of SUNs are non-call for life (or more precisely, until three months prior to their respective maturity dates), and so the only optional redemption available before that time is with the make-whole - a much more attractive prospect for noteholders than a 101 change of control put right.

Noteholders could play the long (riskier) game in hope of some juicy make-whole premiums. Riskier because there is a chance conditions precedent could be waived or modified by the creditors providing the new financing, abandoning holders in a new highly-levered cap stack with potentially $9.5bn of debt senior to them (more on that later).

Make-whole call

For bold players that reject the put, a make-whole call worth 110.9 and 103.4 (assuming a Sep-2022 take-out) may await for the 30s and 27s, respectively. A strategy costing Twitter $132m in premiums to redeem all SUNs at the make-whole; $115m more than if all noteholders put their notes in a change of control offer.

As the closing date approaches the SUNs pricing indicates the likeliness of each outcome. Levels near the make-whole price suggest investors believe the transaction will go through, the refinancing condition will hold, and they expect to be made-whole. Less than 101 raises questions from the market around if the transaction will be executed. Anywhere in between and investors may reject the put and have the option to sell in secondary or hold in hope of the MWC.

How close the notes trade to the make-whole price will depend on how likely investors view it is that the refinancing condition will hold.

Waiving the refinancing condition

A clean new capital structure may be preferable, but could the SUNs remain outstanding (or at least any portion not tendered in a change of control offer) under the new — and significantly more levered — capital structure? It is difficult to speculate on the likelihood that creditors providing the new financing would waive the refinancing condition. But, if they were to do so, it needs to be considered whether the terms of the existing SUNs would permit them to remain outstanding alongside the new substantial debt stack.

Debt capacity under the existing SUNs

Twitter’s outstanding SUNs contain a relatively loose ‘high yield-lite’ covenant package (unsurprising with a rating of Ba2/BB+ at issue). Notably, there is no debt covenant that would restrict incurrence of (unsecured) debt. However, the SUNs do contain a liens covenant that regulates the amount of secured debt that may be incurred. There is also a future guarantors provision, meaning Twitter’s US Restricted Subsidiaries would need to guarantee the SUNs if they guarantee certain other debt.

Generally, Twitter and its US Restricted Subsidiaries may not secure debt in excess of the greater of $5bn and 4x Consolidated EBITDA on assets and property material to the business as a whole unless the SUNs are equally secured. This secured debt threshold (before the liens covenant effectively applies), together with various additional permitted lien carve-outs (including a $2bn credit facilities basket) will permit a substantial amount of secured debt. However, it seems unlikely it would be enough to permit the entirety of the contemplated new secured debt without the need to offer security for the SUNs.

Therefore, while the terms of the existing SUNs would allow them to remain outstanding, the SUNs would need to be guaranteed and likely secured in the same manner as the new secured debt.

Alternatively, the new financing package could be structured in a way that it isn’t regulated at all by Twitter’s existing debt documents (including the SUNs), for example by being incurred at a holding company level above the SUNs’ Restricted Group and secured with a share pledge over Twitter. However, given the size of the contemplated new debt financing and the terms indicated by the commitment documents, it seems unlikely that such a structure is under consideration here.

Consequences if SUNs remain outstanding

If the SUNs do not get refinanced and the unsecured bridge loan is reduced by an equivalent amount, then Twitter’s interest expense would fall by around $100m per year, seeing interest coverage increase 0.3x to 2.3x. Even if the decision was made to decrease the secured bridge loan by $1.7bn, the lower coupons on the SUNs would still see interest expense fall, this time by $43m, only 0.1x of interest coverage.

Alongside avoiding the redemption premium, there is an understandable incentive for Twitter to keep the notes outstanding. Even more so when you consider current market conditions, the loose covenant package and the lengthy tenors on the SUNs.

Note, debt baskets in the commitment papers suggest a structuring EBITDA of around $1.7bn compared with Twitter’s LTM EBITDA of around $1.4bn.

With a newly levered structure – 7.4x gross leverage vs. the current net cash position – the cost of capital will be significantly higher, and without some form of coupon amendment / exchange into the new notes, prices are likely to tumble.

Other potential scenarios

As mentioned, a new and clean capital structure is likely to be preferable here, which would mean refinancing the existing SUNs, be it through the change of control put and/or make-whole or a tender offer somewhere in between.

Not forgetting that there is also the potential of this being a grand ploy by Elon Musk, allowing him to justify a divestiture of Tesla shares before finding a reason to halt the LBO. Or the takeover could fall through in a more diplomatic fashion. Either way, the SUNs will likely revert to prior levels.

If you would like to hear more analysis of the twitter deal, this recent episode of Cloud 9fin features US editor Will Caiger-Smith and 9fin CEO, Steven Hunter, on the deal's structure, how it might come to market, and what Twitter might look like as a credit.

Listen now by clicking here.