Rating agencies aren’t equity investors: the case of Twitter

So Twitter just received a ‘BB-‘ rating on its $1.8bn of debt from S&P.  Shares fell about 7% yesterday on the news, apparently.  Why so sad??

In one of my former roles, I had the opportunity to learn all about rating agency methodology.  The agencies have become a great deal more transparent over the years – you can look at S&P’s methodology on their website.  But the overall theme hasn’t changed: how likely will I receive back all the money I loaned?

Keep in mind that Twitter is a prime example of an internet darling: loads of users, huge opportunities for marketing, etc., etc.  Equity investors clearly believe the story, with Twitter having a $26bn market cap despite no earnings.  The agencies are MUCH different: who cares about expansion plans, if it doesn’t pay down the debt?

Compare Twitter to the opposite end of the tech spectrum: Apple has a ‘AA+’ rating from the agencies.  There is always speculation about how Apple will continue growing and/or pay back shareholders (thanks, Mr Icahn), but in the meantime Apple’s $60bn or so of Operating Cash Flow pays down a LOT of debt.  Debt investors = happy (aside from the fact they’re receiving very little interest).

Anyway, just interesting to see the Twitter share price crash so much on the rating news.  What were the equity investors thinking?  S&P would buy the same hype for getting bonds repaid?  I don’t think so.


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