High yield investors are flocking to Twitter’s debut offering, citing the social media company’s abundant free cash flow and overall cash balance – a dynamic that sets it apart from cash burning tech unicorns like Uber and Tesla, according to six sources tracking the deal.

The company’s marketing efforts in support of the initial deal will additionally help open the door to future market taps for refinancing or M&A needs as the borrower seeks to grow its platform, the sources added.

Led by JPMorgan, Twitter is looking to raise USD 600m of senior unsecured notes due 2027, whispered at 4.5% area, possibly tightening further. The notes are expected to price tomorrow (5 December).

Pro forma the deal, liquidity totals USD 6.911bn through USD 6.411bn of cash and short-term investments and an undrawn USD 500m revolving credit facility. The company’s net cash position is roughly USD 4bn with USD 6.411bn in pro forma cash and USD 2.7bn in pro forma debt.

After the deal, the company’s capital structure will consist of the proposed notes, USD 954m of 1% convertible notes due 2021 and USD 1.15bn 0.25% convertible notes due 2024.

Proceeds from the offering will be used for general corporate purposes. According to deal documents, the company’s go-forward financial approach includes investing to grow its platform, managing the capital structure through low net leverage and staggered debt maturities, and maintaining liquidity for M&A and growth initiatives.

As such, the offering in the market allows the company to establish a foothold with investors and return for a potential refinancing of its 2021 convertible notes or an M&A transaction, three of the sources said. The strike price for the 2021 converts is above USD 77 per share, and with Twitter’s stock trading at USD 30 per share (and a USD 23bn market cap), the borrower will likely need to refinance the notes with cash or debt, one of the sources said.

Meanwhile, as an international company, Twitter’s liquidity is held in several currencies. Rather than repatriating funds held in foreign accounts, the company can tap the high yield market for more immediate access to liquidity, the sources added.

Twitter is 2.2x-levered on a gross basis, based on USD 2.7bn of pro forma total debt and USD 1.236bn of LTM adjusted EBITDA.

Sources expect the company’s free cash flow to be roughly USD 883m (33% of total debt) in 2020, based on USD 1.4bn of adjusted EBITDA, USD 475m of capital expenditures and USD 42m of interest expense.

Growing wings

Founded in 2006, the social media platform generates its revenue from two segments: advertising (86% of LTM revenue) and data licensing (14% LTM revenue).

The advertising segment includes promoted tweets, promoted accounts, promoted trends and other advertising services. In the data licensing segment, customers can access mobile advertising exchange services as well as search and analyze historical and real-time platform data.

As of 30 September, the company’s monetizable daily active user (mDAU) stood at 145m, compared to 124m in the same quarter last year, with fewer than 5% of the quarter’s mDAU represented by false or spam accounts, according to company documents.

While Twitter’s mDAU count has increased steadily for the past few quarters, sources wonder if the company will be able to sustain the momentum in the long-term, five or 10 years down the line, three of the sources said.

“Sure, they have free cash flow, but it’s not even technology, it’s social media,” said one of the sources. “It’s something that is great until it’s not. When it goes bad, it goes bad all at once.”

Twitter is the 12th most popular social media network, compared to Facebook, the most popular, and YouTube, the second most popular, according to a Statista study on most popular social media networks worldwide as of October.

On a relative value basis, sources placed Twitter in a different category than other tech unicorns in the high yield space, including Uber and Tesla, due to its ample free cash flow generation.

While not a perfect comp, sources see the Ba2/BB+ proposed bond pricing in line with Netflix, arguing that despite the positive cash flow, Twitter is also at a slight disadvantage with more exposure to macroeconomic or ad space cyclicality compared to Netflix’s subscription-based model.

Netflix’s Ba3/BB- USD 1.6bn 4.875% senior unsecured notes due 2028 last traded today at 102.905 to yield 4.454%, in line with recent levels, according to MarketAxess.

Twitter and JPMorgan declined to comment.

2019 Debtwire