Saturday, February 4, 2023

What if Elon Musk’s Twitter files for bankruptcy?

  • Elon Musk has raised bankruptcy as a possibility for Twitter, but said this week that costs are “under control”.
  • Twitter reportedly owes about $13 billion in debt to a group of banks, with annual interest payments of $1 billion.
  • Businesses can use Chapter 11 to reduce debt, but it gives lenders control over their future.
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Elon Musk assured All-in Podcast That Twitter is not in the high lane toward bankruptcy qualifies some of the sad warnings it issued to employees last month after the platform was taken over.

Twitter’s CEO said on Saturday, “Our expenses are largely under control, so the company is no longer accelerating towards bankruptcy.” He later clarified that Twitter is “still not secure.”

Bankruptcy would be a complex, expensive and very public court proceeding that could help reduce some of Twitter’s $13 billion in bank debt. But it could also cause Musk to lose control of the platform.

In a Chapter 11 reorganization, parties such as secured lenders and other creditors take advantage of demanding a leadership change as a condition of approving the bankruptcy exit plan. Insolvency experts said that alternatively, the assets of the company could also be sold to a new buyer who wants to take it over.

“It is not unusual for companies to undergo a change of management during bankruptcy; Either in response to the requirements of a secured lender or to increase confidence in the process,” said Brooke Gottberg, a law professor at Brigham Young University.

insider Requests for comment sent to Twitter’s press office and Musk’s email address at Tesla elicited no response Tuesday.

Elon Musk cuts Twitter costs to avoid bankruptcy

Musk has been in intense cost-cutting mode since the official acquisition of Twitter on October 27. As its self-proclaimed CEO, he oversaw the layoffs of most of its 7,500 employees as well as an exodus of top leaders. In turn, Musk is still looking for ways to reduce operating expenses, reports Kali Hays. insider,

The company also owes around $13,000 million in debt to banks such as Morgan Stanley, which anticipate problems to collect it, reported reuters this month. This could pressure lenders to work with Musk to restructure the debt; Either in court or in private, experts said.

“I don’t think major restructuring alone always means filing for bankruptcy,” said Christopher Hampson, a law professor at the University of Florida. “I would put a lot of weight on whether there is any indication of imminent interest payments and revenue from Twitter.”

Musk’s leveraged buyout of Twitter comes at a cost of its own, with such large borrowed funds. Specifically, more than $1,000 million in interest payments, which are due next year, were reported reuters,

Businesses that handle large amounts of secured debt – often backed by their available cash, assets such as property or inventory – sometimes use Chapter 11 bankruptcy as a way to restructure so they can stay in business. Twitter, which was bought by elite funders — including top venture capital firms and foreign investors — may face pressure from secured lenders to find a solution.

Lenders and others to whom an insolvent company owes money have a lot to say about the reorganization. They attend court hearings to decide how the company can access its cash reserves or whether to approve any new financing to help through the process.

Some creditors are more practical. Banks can eliminate their loans to investors such as hedge funds and private equity firms, who typically have greater control in decisions about the management and direction of a failed company, said Gottberg, the BYU law professor.

“The priority of the banks is to get paid, they are not interested in long-term leadership,” he said. “Hedge funds view it as an investment.”

Twitter shareholders and Musk himself will be affected by bankruptcy

A court-supervised bankruptcy follows a general framework for paying off the creditors of an insolvent business. Specifically, it gives priority to those who have secured loans to get paid first and excludes those who have shares in the company.

Lawyers said this means secured lenders such as banks get most of the recovery, while shareholders including Musk could lose the value of their capital unless they find ways to preserve it.

“Actions don’t always go away, and I think there will be a variety of deals,” said Joseph Moldovan, who chairs the restructuring practice at Morrison Cohen LLP.

Since Twitter no longer reports its financials to the SEC since Musk’s purchase made it private, it is hard to find information about its balance sheet that could indicate the possibility of a restructuring. Instead, the signal may come from the earnings statements of banks that report the value of loans they hold. The Moldovan said signs of trouble could provide insight into whether restructuring could be discussed.

“One of the things to watch is how the banks mark these loans,” he said. “If banks reduce the value of loans, it means that there is a possibility that they will not be repaid in full.”

now read: Elon Musk continues to cut costs and layoffs as he tries to attract new investment

Read also: Elon Musk Says There’s No Successor If He Steps Down as Twitter CEO: ‘Nobody Wants the Job’

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