Twitter Debt Rated as Junk
Twitter Inc. ’s debt was rated as junk on Thursday by Standard & Poor’s Ratings Services, a sobering grade that comes a day after executives of the social media service tried to reassure skeptics on Wall Street of its long-term growth plan.
S&P gave Twitter a double-B minus rating, noting that Twitter is investing aggressively and that, depending on the level of business reinvestment, the company may not generate positive discretionary cash flow until 2016.
S&P said the unsolicited rating came in light of Twitter’s $1.8 billion debt offering in September. Twitter remains unprofitable, weighed down by stock-based pay that represented 47% of third-quarter revenue, reflecting in part the company’s hypergrowth phase as it offers cushy packages to compete for top talent.
Overall, the rating agency characterized Twitter’s risk profile as “fair.” On Thursday, Twitter’s stock fell 5.9% to $40.04, and it is down about 37% this year.
S&P guidelines say the unit of McGraw Hill Financial Inc. publishes unsolicited ratings for debt deals of $1 billion or more. S&P issues tens of thousands of corporate bond ratings every year, but only a handful are unsolicited.
Other Silicon Valley companies have been targeted for unsolicited ratings, includingYahoo Inc. and Nvidia Corp. , which both received double-B plus grades in December 2013.
Twitter’s rating is assigned to 7.4% of U.S. corporations, as of Oct. 31, including Netflix Inc. and Sprint Corp. It is two notches above the single-B rating, the dominant category in the U.S. of which 26% of corporations are assigned. The distinction between junk and investment grade ratings is important. Big buyers of debt, such as insurers and pension funds, are limited in their ability to invest in riskier junk bonds. S&P’s chief rivals, Fitch Ratings and Moody’s Corp., have not rated Twitter.
Twitter’s rating has punctured some of the enthusiasm following Twitter’s first analyst day on Wednesday. Over the course of eight hours, company executives shared their detailed plans on the company’s growth strategy in an attempt to counter rising investor concerns about its long-term prospects.
The stock shot up 7.5% Wednesday to $42.54.
Analysts, in general, walked away from the event reassured about the company’s ability to churn out product changes faster and make money from its extended audience groups. Company executives disclosed half a dozen changes that are in the works or currently being tested, such as video sharing and curating feeds for the most relevant content, that will help it become a ubiquitously used service like rival Facebook Inc. that has five times as many users.
At the same time, making note of Twitter’s mixed track record in regards to product execution, some had lingering doubts about its ability to translate the initiatives into growing its 284 million monthly active user base into a bigger and more robust group.
“As expected, Twitter talked about long-term expectations and presented a well-organized and reasonably detailed road map,” wrote Macquarie analyst Ben Schachter in a note to clients Thursday. “The tone was positive and optimistic; however, management must now execute on near-term goals.”
In the third quarter, Twitter’s revenue grew for a seventh straight period from a year earlier, to $361 million. But its loss widened to $175.5 million.
As of Sept. 30, S&P noted, Twitter had about $3.6 billion in cash and cash equivalents and short-term investments, including $1.8 billion in convertible notes it offered in September. Twitter said at the time it intended to use the proceeds of that offering for general corporate purposes. In a securities filing last week, Twitter said that the convertible bond offering “could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders or holder of the Notes.”
S&P did rate Twitter’s outlook as stable, citing the company’s competitive position and high-growth potential, a line that Twitter spokesman Jim Prosser pointed to as comment.
The ratings firm added that it expects the San Francisco social media company to grow significantly over the next two to three years as it continues to expand internationally.
S&P also said it is watching the numbers on the company’s monthly active users and revenue growth as well as cash flow, key indicators of the company’s health. It doesn’t anticipate Twitter offering dividends or buying back stock.
Source: wsj – Twitter Debt Rated as Junk
