If they made $1B profit before counting the loan, they would spend that profit on the loan. Effectively the same concept: they need to revenue to clear operating expenses PLUS a $1B loan payment.
In 2020 twitter had a net loss of $1.14B. The loans will kill twitter.
It might be interesting to know the subtlety if it is in the Twitter context. Is it better to look at cash, loc, and cashflow to determine if they can pay the loan repayments?
Essentially, yes. The GAAP income statement is a very poor proxy for cash flow generation ability. That captures 80% of it.
There’s also operating leverage. This business should trend to 50-80% gross margins and 30-50% profit / free cash flow conversion, similar to Facebook, Google, or other similar businesses.
Further, there’s a bunch of pre- and post- transaction adjustments that hit the financial statements (for example stock based compensation will likely go away in a private company, thus raising profitability), so you can’t just take last years profit and tack on the new debt structure.
Last, the amortization on high yield isn’t necessarily linear. In the most extreme example (where the debt costs >12%) you could have pay-in-kind (PIK) interest where the interest payments accrue to the balance of the loan (like a credit card) and for amortization, it could be anywhere from straight line (1/x periods) to a “bullet” with no amortization at all until a end period where it all comes due at once (you typically refinance in that case).
All-in, it may be risky, but the bankers that committed billions of capital to the deal aren’t exactly brain dead and all have internal credit approval processes which require them to do all the work outlined above and a bunch more.
> for example stock based compensation will likely go away in a private company, thus raising profitability
They're paying out vests on the sales price in cash, which was higher than the value of the company. Normally equity comp places the price fluctuation risk on the employee, but in this case, they're directly eating this cost.
If they don't offer salaries that are competitive with other companies total comp, they will bleed employees, and won't be able to hire talented engineers.
So, no, this really doesn't help, and if anything it increases their direct costs.
You didn't dispute my point that they still need another $1.2B/year. And even looking at their 10 past years (where 2020 was the highest income), it's still bleak.
I don't know why you dissed my response, then gave an answer that basically supports it.
Do you try to save tax every year by “maximising your losses”? Or aka claiming as many expenses ad possible. This reduces your income! But even if you took 100k off your income aka “profit” this way you could still afford your mortgage, right… infact it makes it more affordable as you paid less tax!
Sigh. Sure. There’s 7 banks or so in the lending group, each with 5 to 12 FTEs touching or reviewing this deal before funding.
But sure, you’re smarter than them all combined, they’re wrong and underwrote a faulty deal and you’re right, particularly when having no info on the post transaction capital structure.
