Twitter is issuing bonds rated below “investment grade.” Here’s what that means.
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Twitter wants to raise some cash in the bond market. The social media company’s most recent earnings came in below expectations, and now it’s aiming to raise $600 million in unsecured debt.
Companies get an “investment grade” rating on their bonds when ratings agencies think those companies have a very low chance of defaulting on their debt.
Companies that receive investment grade ratings are typically large and have robust barriers to entry, said Vishal Merani, the director of corporate ratings for S&P Global, which rated Twitter’s new bonds as below investment grade.
Ratings agencies also gauge whether a company can survive an economic shock, which typically requires it to have diverse revenue sources.
“We don’t think [Twitter] has the level of diversification necessary,” Merani said. “It doesn’t have, necessarily, the level of scale of some of the larger players.”
But getting a rating below investment grade isn’t like failing a homework assignment. In fact, S&P and Moody’s both said Twitter’s balance sheet is pretty healthy.
Jim Vogel, executive vice president at FHN Financial, said investors are eager to get a slice of Twitter’s bonds because it’s profitable and has name recognition.
Even for solid companies, losing the investment grade label can have consequences. Matteo Arena, associate professor of finance at Marquette University, said big pension funds and certain mutual funds only buy investment grade bonds.
“As you go down in the ratings, a lot of your investment clientele goes away,” Arena said.
But because investment grade bonds are safer, they don’t have to pay much in interest. Arena said investors can make more money — sometimes much more — with bonds that are riskier.
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