US LevFin Wrap — Twitter’s debt debacle, Crosby banks get hung, Continental shows the way

William Hoffman
+Will Caiger-Smith

28 October 2022•6 min read

Fine, we’ll start with Twitter. Elon Musk has finally closed his purchase of the notoriously underperforming social media giant, bringing to a close one of the most bizarre M&A stories of our time — or maybe just the first chapter of it.

Shareholders can breathe a sigh of relief, and while Parag Agrawal, some key top executives and other Twitter employees are now out of a job, they probably saw this coming and may be relieved not to be working for the guy their company was about to take to court.

For the credit market, however, the story is only just beginning. While the banks are reportedly holding onto Twitter’s debt for the time being, it’s extremely likely they will at some point look for an exit. Their ability to find one is now partly in the hands of a notoriously mercurial billionaire.

A few weeks back, we estimated (based on some generous assumptions) around $500m of losses if the banks were to syndicate the debt. Broadly speaking, yields today are roughly at the same levels as when we made those calculations — but a lot has also changed.

Since then, a lot of new information has emerged about how Twitter might change under Musk. That all impacts the hypothetical credit spreads investors might demand to hold the company’s debt, which in turn impacts the hypothetical losses banks might take when selling it.

Anyway…as long as this selldown remains hypothetical, there are no covenant packages for us to pore over, no lender pitches about turning Twitter into a crypto-focused WeChat-style super-app, no Musk-adjusted credit metrics to haircut. It’s kind of a bummer, as we’re itching to dig in.

We may not have to wait too long, though: in a call with bankers earlier this week, Musk reportedly pledged to help sell the debt to investors after the deal closes.

Let that sink in (via Twitter, obviously)

Some of us are old enough to remember how starstruck bond investors were when Musk appeared on conference calls to market Tesla’s debut high yield issue back in 2017. Things are very different today; what kind of reception will he get this time?

Until that day comes, all eyes are on Twitter HQ. Will Musk be the savior of the town square, or its problematic antihero? In the words of The Verge’s excellent Nilay Patel: “You break it, you buy it”.

On the hook

Speaking of hung deals, with all the noise around Twitter you might have missed the latest update on The Crosby Group’s acquisition of KITO Corporation.

The maker of industrial hooks and rigging equipment this week announced it had closed $380m of term loans to fund the deal. The underwriters (led by UBS, currently the less controversial Swiss bank, although it has its own challenges) are now working hard to sell down their exposure.

They’re offering the debt at a steep discount. After earlier efforts to drum up lender interest fell flat, the structure was tweaked — there is a new $50m second lien piece, and the first lien component was downsized. The full debt package includes a $120m revolver, undrawn at close.

In our story yesterday afternoon, we revealed another hitherto undisclosed detail about the transaction: Crosby’s sponsor, KKR, has agreed to inject at least $100m of fresh equity into the company in conjunction with the acquisition.

Bankers are hoping to close syndication within the next few days. At current price talk, the deal offers a juicy yield — but investors will have to weigh that against the prospect of financing a multinational merger, in a cyclical sector, ahead of a possible recession.

Elsewhere in primary, chemicals company INEOS Group is out with a €1.15bn-equivalent refinancing transaction, split across $750m and €400m five-year TLB tranches.

Check out our European wrap for more on that deal — and if you like your chemicals credits with a side of salmon, here’s a a slightly fawning FT article about how INEOS chief exec Jim Ratcliffe is buying up swaths of Iceland’s best fly-fishing river.

Waiting it out

In the past few days, GoDaddy, Citco and Entain have shown that there are deals to be done in the loan market. It’s somewhat reassuring to see a new deal price at 98, rather than 10 points lower.

Still, primary supply is expected to remain muted next week, as the Federal Reserve is expected to raise interest rates yet again. Until the rate outlook stabilizes, companies are unlikely to be in a rush to tap the debt markets.

“A lot of the opportunistic financings will get pushed into next year, on the hopes that you get through the peak in rates and that the long end starts to stabilize or even come down,” said a high yield portfolio manager.

“If you're comfortable with the fundamentals of your business, you’ll probably want to wait until 2023 to try to tap the market even if the economy is getting worse.”

Speaking of rates, new research from KBRA suggests that borrowers in the private credit market may be facing “the most significant period of stress” in its history, as rising base rates constrain free cash flow.

The study found that by next year, around 43% of private credit borrowers may not generate enough operational cash flow to cover their interest costs. That’s on an unhedged basis, so the real impact will probably be lower, but still — check out our summary of the report here.

Big energy

Everybody loves a comeback story, and this year the energy sector has delivered one. It has become one of the credit market’s best performing areas this year, so Harold Hamm’s take-private of Continental Resources is worth paying attention to.

Even though it’s IG-rated, plenty of high-yield accounts still hold the name. And this deal may highlight a growing dichotomy between public and private energy credits.

Public companies are sticking to a more conservative script, using their newfound free cash flow for debt reduction. Private names, meanwhile, are increasingly putting their money to work in new drilling sites — see our full story here.

Speaking of energy, 9fin is heading to the Thomson Reuters ESG conference in New York next week.

Elizabeth Lewis, deputy head of ESG at Blackstone, is delivering the keynote address — and based on our recent experiences at another finance conference and yesterday’s demonstrations outside Stephen Schwarzman’s apartment, it might be wise to prepare for interruptions.