Twitter Is Junk, Says S&P

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This is what S&P thinks of Twitter's debt.

Twitter shares are down more than 5% in afternoon trade on Thursday, giving up almost all of their gains from yesterday, after the company received a "junk" rating from credit agency S&P.

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S&P gave Twitter a 'BB-' corporate credit rating and said the company's outlook is stable.

Any rating from S&P under 'BBB-' is considered "speculative grade," otherwise known in the bond world as "junk."

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Thursday's tumble in Twitter comes after the stock gained more than 7% on Wednesday after the company held an analyst day, at which the company' CFO made what Business Insider's Jay Yarow called a "wild" revenue projection, among other things.

In its rating, S&P analyst Andy Liu said, "The unsolicited 'BB-' corporate credit rating incorporates our assumption of healthy growth in monthly active users and revenues, the possibility of positive discretionary cash flow in 2016, and ongoing minimal debt leverage."

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S&P added that Twitter is investing very aggressively in growth. Depending on the level of business reinvestment, Twitter may not generate positive discretionary cash flow until 2016.

S&P's rating on Thursday was a "unsolicited" rating, meaning it was initiated by S&P and may be based only on publicly available information and may not have included cooperation from the company.

Here's the full release from S&P:

CHICAGO (Standard & Poor's) Nov. 13, 2014--Standard & Poor's Ratings Services said today that it assigned its unsolicited 'BB-' corporate credit rating to San Francisco-based social networking company Twitter Inc. The outlook is stable. At the same time, we assigned our unsolicited 'BB-' issue-level rating and unsolicited '3' recovery rating to the company's $1.8 billion convertible notes, which comprise $900 million 0.25% convertible notes due 2019 and $900 million 1% convertible notes due 2021. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%) of principal for debtholders in the event of a payment default.

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Twitter will use proceeds from debt issuance for general corporate purposes, including acquisitions and operating needs. As of Sept. 30, 2014, the company had about $3.6 billion in cash and cash equivalents and short-term investments. The $3.6 billion included net proceeds from the convertible notes offering.

"The unsolicited 'BB-' corporate credit rating incorporates our assumption of healthy growth in monthly active users and revenues, the possibility of positive discretionary cash flow in 2016, and ongoing minimal debt leverage," said Standard & Poor's credit analyst Andy Liu. 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.

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"The stable outlook reflects our expectation that Twitter will continue to experience very strong growth and not encounter a significant increase in competitive pressure," said Mr. Liu. We expect the company to experience very high growth over the next two to three years as it expands internationally and grows revenue as well as to maintain meaningful cash balances to offset negative discretionary cash flow and offset volatility. We do not expect it to pursue shareholder return activities such as share buybacks and dividends.

We could raise the rating if Twitter broadens its revenue sources through international expansion and new product launches, maintains its market position, continues to improve its profitability, and achieves positive and
sustained discretionary cash flow in excess of $100 million in 2016.

We could lower the rating if Twitter is unable to achieve positive discretionary cash flow and if there is a marked deceleration in revenue growth or if revenue actually contracts. This could indicate that the business model may be facing significant risks, which could cause us to revise our "fair" business risk profile assessment. A sizable acquisition that significantly depletes the company's cash balances could also result in a downgrade.

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