Musk Risks ‘Battle Royale’ With Creditors as He Remakes Twitter

Elon Musk’s project to overhaul Twitter Inc. after taking it private carries potential legal risks, even though the billionaire doesn’t have to worry about keeping shareholders happy.

Musk still has to answer to the consortium of seven banks that provided $13 billion in financing for the buyout. The banks are likely to be patient for now, while Musk works to make Twitter more profitable. If Twitter’s revenue drops, though, Musk faces litigation perils.

The clearest risks involve creditors, both the banks behind the initial deal financing and the secondary investors to whom they’re expected to farm out the loans, observers said. Creditors may take action if they start to worry about debt payments.

“Once they start to think this company might be on the brink of insolvency, they will start scouring their debt contracts, looking at the covenants, and asking if someone has been a little asleep at the wheel,” Columbia University law professor Eric Talley said.

The financial institutions backing the initial loans, which come with roughly $1 billion in annual interest payments, include Bank of America Corp., Barclays Plc, BNP Paribas SA, and Morgan Stanley.

Twitter didn’t immediately respond to a request for comment.

Debt Restructuring

A decline in Twitter’s fortunes could lead to creative efforts to restructure the loans.

If Musk “doesn’t turn this boat around in the next six months, not only is that a possibility,” Talley added. “I actually think it’s a probability.”

Talley pointed to increasingly popular restructuring plans, called “up-tier” or “drop-down” transactions, that pit different groups of creditors against one another, for example by seeking 51% approval for a plan that leaves 49% of them empty-handed.

Savvy creditors aware of the tactic could seek to head it off by suing Musk for breach of contract “right at that moment,” as soon as any shakeup is announced, leading to “a battle royale of debt restructuring,” Talley said. Those lawsuits could be brought either by the banks or the holders of syndicated debt, who could demand immediate repayment of the full loan, he said.

Creditor Leverage

The terms of the loan agreements underlying Musk’s purchase of Twitter aren’t public. But they likely include standard covenants providing that missed payments give the banks the right to immediately accelerate the full principal, according to Berkeley Law professor Adam Badawi.

Such pacts also often include similar repayment rights pegged to other guarantees, such as an asset-to-liability ratio, he said.

“The number one thing they’re going to worry about is the ability to pay back the loans,” Badawi said. “Twitter misses a debt payment, that trips a covenant, and the loanholders can come in and say the debt is due right now.”

The lenders are unlikely to accelerate the debt any time soon and risk destroying Twitter, a company on which they’ve bet big. But should they sour on Musk, a breach would give the lenders significant leverage, perhaps enough to sideline him as a condition of waiving the covenants, unless he wants to pay off the loans personally, Badawi said.

Secondary debtholders, meanwhile, would have other options if Musk—who has repeatedly faced legal peril over his tweets—uses his Twitter megaphone to unduly hype the platform’s prospects. They could file fraud suits against both the Twitter and Musk, claiming they were duped into buying the debts, Talley said.

The new “Chief Twit” claimed in a Nov. 7 tweet that “usage is at an all-time high lol.” Musk’s claim can’t be independently verified, but although “there are no shareholders to lie to” anymore, any inaccurate statements about the platform’s metrics could constitute fraud on advertisers, Tulane University law professor Ann Lipton said.

Read More: Twitter’s Big Debt Bills Add Urgency to Musk’s Turnaround Plans

‘Grease Fire’

Musk also still has to contend with Tesla Inc. investors, who could claim his focus on Twitter has harmed the electric vehicle maker by diverting his attention, or in other ways, Lipton said.

The weaker version of such a claim might involve allegations that the automaker’s engineers are being used at Twitter. Though that’s technically a conflicted transaction, with Musk on both sides, the amounts at stake are probably not worth litigation, she said.

But the episode could still be relevant to a stronger case, one involving claims that Musk—whose $56 billion Tesla pay package is headed for a trial next week in Delaware—is a wildly overpaid “part-time CEO who’s actually harming Tesla’s value,” according to Lipton.

There’s a “line of plaintiffs that want to sue the Tesla board for failing to oversee Musk,” and “the more Tesla’s stock price drops, the more tempted plaintiffs are going to be,” she said.

Talley agreed, saying investors could claim Musk is “so busy putting out the grease fire at Twitter that he’s going to put Tesla on cruise control.”

Such a case would be “a long shot, but it’s not a crazy type of lawsuit to bring,” Talley said.