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Twitter marks S&P entry with $1bn trip to debt market

Jun 07 2018 10:05
Molly Smith, Bloomberg

Twitter is celebrating its entry into the stock-market big leagues by selling $1bn of bonds in its second-ever debt offering.

The convertible note sale comes just a day before the company is welcomed into the S&P 500 Index, which will force index funds with trillions of dollars in assets to own it.

The move marks a kind of coming of age for the microblogging site, which for years struggled to rise beyond its image as an insular platform for celebrities, politicians and journalists, and which never quite seemed to measure up to bigger rival Facebook.

Twitter’s shares surged soon after its 2013 initial public offering, but then fell more than 80% from their peak in the next three years. More recently, the company’s started to turn things around.

"The timing of a convertible-bond deal with the company’s entrance into the S&P 500 makes sense," said Dave King, a senior portfolio manager at Columbia Threadneedle Investments. “There will likely be a strong demand for the stock from index funds,” he said.

That would help offset selling pressure from convertible arbitragers trying to establish short positions in Twitter, in anticipation of going long the new bonds, King said.

Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co are leading the underwriting of the bond sale, according to people with knowledge of the matter, who asked not to be identified discussing private details.

Representatives for San Francisco-based Twitter declined to comment.

Purchase option

The social media company said in a statement on Wednesday it also plans to allow initial buyers of the unsecured securities a 30-day option to purchase up to an additional $150m in principal to cover over-allotments, should there be any.

Twitter said it will enter into privately negotiated convertible-note hedge transactions with one or more of the underwriters or other financial institutions, which the company expects to help minimise any dilutive impact on its common stock upon conversion of the notes.

The proceeds of the bonds will be used to pay the cost of these transactions as well as for general corporate purposes, according to the statement.

The hedge transactions are a call spread, or the simultaneous sale and purchase of call options with different strike prices, to effectively raise the conversion price. That means that Twitter will essentially avoid issuing shares unless its stock price rises more.

Stock doubles

Twitter’s share price has more than doubled from last year’s low on optimism over CEO Jack Dorsey’s strategy to push into live video and more personalised content, boosting its appeal among users and advertisers.

After having reported quarterly losses every quarter as a public company, Twitter posted positive earnings in the fourth quarter of last year and the first of 2018.

“It is paramount to issue convertible bonds when the stock price is higher,” said Chris Hartman, a senior portfolio manager at Aegon Asset Management. “This issue is an interesting way to get involved again in the equity.”

Twitter will replace Monsanto in the S&P 500 prior to the start of trading on Thursday. Its stock was up 0.2% as of 1:00 pm in New York trading on Wednesday.

The company’s first debt offering came in September 2014, when it raised $1.8bn of convertible notes in a boosted sale.

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