Twitter, the micro-blogging social media company has sounded out investors on their potential interest in a $600 million bond issue. Having received a largely positive response, it is not expected that the debt will be issued during the U.S. trading session today. It will be Twitter’s first step into selling debt on capital markets and is being seen as a response to sluggish third-quarter earnings.
Revenue growth of 9% was short of analyst expectations and at its lowest level in a year and a half. As a result, net income, even adjusted for a significant tax benefit over the same quarter a year earlier, plummeted 60% to $36.5 million. The poor results were put down to a “bug” in Twitter’s ad targeting system which reduced ad spend over the period.
However, that doesn’t appear to have hit investor interest in a bond sale and strong demand is expected. Twitter’s advantage, unlike other major U.S. tech companies like Tesla and Netflix, that have turned to debt markets, is that the company is cash flow positive. The company holds cash and short-term investments worth $5.8 billion. That cash pile is, crucially, significantly more than the company’s existing debt – around $2.2 billion made up of three convertible bond issues.
Commenting on the new junk bond proposal, Diamond Hill Capital Management portfolio manager John McClain comment for the Financial Times:
“From a debt holder’s perspective, it’s a lay-up.”
For those less familiar with the baseball reference, a ‘lay-up’ refers to an easy hit. Ratings agencies S&P Global and Moody’s have also recently raised Twitter’s credit rating to a double-B and double-B plus rating respectively, as a result of the company’s strong cash reserves. That rates Twitter at the highest possible credit worthiness for a ‘junk bond’ issuer. The company’s credit rating is only just off what is referred to as ‘investment grade’ bonds – a rating that usually requires a long and positive history of borrowing.
It means that investors should be able to take advantage of a very good risk to reward ratio on the new Twitter bonds. Double-B rated debt has seen returns reach as high as 14% this year on strong investor demand. Investors are nervous of taking on debt issued by companies with lower credit ratings due to economic uncertainty. Despite initially planning on attaching a 4.5% coupon to the bonds, strong investor demand has seen Twitter revise that downwards to somewhere between 4% and 4.25%.
Ken Monaghan, co-director of high yield at asset manager Amundi Pioneer commented:
“The market is strong right now, but it’s also quiet and investors clearly have cash to put to work. I am sure people are looking at this as one of their last new issue opportunities of the year.”