14th November 2014
US ratings agency Standard & Poor’s has given social media site Twitter’s debt a ‘junk’ rating
Twitter issued $1.8 billion (£1.1 billion) of bonds in September – the bonds are effectively IOU’s from a company to an investor. When issued the bonds have a ‘coupon’ or interest rate that the company says it will pay the investor, usually twice a year, and a ‘maturity date’, the date at which the company aims to pay back the original loan to the investor.
The more secure a company is the higher the rating they receive but where a rating agency is concerned about a company’s ability to pay the coupon and the original loan the rating is reduced to ‘junk’.
The higher the investment grading the lower the interest received on the loan because the risk is lower.
S&P has now downgraded the Twitter debt to a ‘speculative’ BB-, which is three notches below investment grade bonds. Shares in Twitter fell nearly 6% on the news taking the total loss this year to 37%.
In a note, S&P said the social network’s ‘aggressive’ growth and slow earnings were behind the rating.
‘The company is investing very aggressively in growth. Depending on the level of business reinvestment, Twitter may not generate positive discretionary cash flow until 2016,’ said S&P.
Last month the company reported a 7% drop in timeline views per user, a measure of engagement with the site, despite users growing 23%.
It has also warned Q4 revenue may be below market expectations of $448.8 million (£283 million).
S&P said that its junk rating would be raised if the company launched new products to broaden its revenue sources and maintained market share, as well as improving profitability and cash flow. However, it could be downgraded even more, warned S&P.