Elon Musk’s $44 billion takeover of Twitter should be one of the ultimate rewards for Wall Street lenders as seven banks tripped over each other to borrow $13 billion to fund the deal in April.
Now these lenders are staring at losses that could reach hundreds of millions of dollars or more as they prepare to transfer billions of dollars to Musk.
The $13 billion debt financing led by Morgan Stanley and a clique of some of the biggest names in leveraged finance has become the focus for dealmakers on both sides of a chaotic takeover that has drawn public attention .
The banks, including Bank of America, Barclays and Japanese bank and Morgan Stanley investor MUFG, are not expected to attempt a leveraged buyout of $12.5 billion in debt, according to several people who are over the matter have been informed.
Instead, they’ll likely fund it themselves and keep the $12.5 billion on their own balance sheets as volatile debt markets and the threat of further litigation between the social media site and Musk hang over the deal. They will also keep a $500 million revolving credit facility on their balance sheets, money that a privately held Twitter could soon tap as it begins a restructuring.
The debt funding is separate from the roughly $33 billion in cash Musk has to raise himself, some of which he has raised from outside investors.
The $13 billion debt package includes a $6.5 billion term loan, $3 billion secured debt and $3 billion in unsecured debt — the riskiest Part of the deal and a corner of debt markets almost completely paralyzed amid the broader financial market sell-off.
The yield banks would need to market the debt to investors today is far higher than the terms they agreed in April. However, since they have already committed to these initial terms, they must offset any additional discount themselves.
This will result in paper losses likely to reach hundreds of millions of dollars. Credit analysis firm 9fin estimated losses at $500 million after factoring in tens of millions in fees banks earn. People involved in the funding package said losses could total nearly $1 billion given the troubles Twitter’s business has faced this year and the rapid deterioration in credit markets.
“The gap between banks’ willingness to take the loss and people’s willingness to buy Twitter [debt] is too broad to close a deal, so if a deal goes through they’ll have to sit with it for a while,” said Roberta Goss, senior managing director at wealth manager Pretium. “This is going to be ugly.”
It’s an incredible change from April, when bankers accelerated due diligence processes over the Easter break so Musk could make a credible funding presentation to Twitter’s board of directors. Several banks were comfortable with the deal because of the sheer size of the check Musk wrote.
“Will he let a $30 billion equity valuation go for him in a default on a $12 billion debt? He would just pay off the debt,” a banker told the Financial Times in April. “Many banks felt comfortable like that.”
Morgan Stanley, Bank of America, Barclays and MUFG, which are on the hook for $11.15 billion of the $12.5 billion package, declined to comment. Mizuho, BNP Paribas and Société Générale, which have jointly committed to lending the remaining $1.35 billion, also declined to comment.
Big banks are struggling to pay off tens of billions of dollars in debt they pledged to fund this year. They suffered $600 million in realized losses late last month when they dumped $8.55 billion in debt to fund its acquisition of software maker Citrix.
The group of lenders was stuck holding about $6.5 billion in Citrix debt on their own balance sheets, with the risk that their losses could skyrocket if they sold the riskiest portion of the bond funding.
Last week, banks shelved a proposed $3.9 billion debt bid to fund Apollo Global Management’s acquisition of telecoms giant Brightspeed after failing to find willing investors. They are also working on financing acquisitions of media ratings firm Nielsen, television network Tegna and auto parts maker Tenneco.
The terms of the funding package may be one reason why Musk surprised Twitter earlier this week when, after previously trying to exit, he said he would go with his $44 billion acquisition at the original price of $54.20 Continue. If he were to renegotiate a lower price, Musk risked having to return to bank lenders to rearrange financing at far more expensive rates due to rising interest rates.
“The funding package, if it goes through, is very valuable to Elon Musk. There is hidden value in that,” said David Allen, Chief Investment Officer of AlbaCore Capital Group.
Allen estimated the package was worth billions of dollars to Musk, mitigating some of the perceived erosion of Twitter’s overall stock value since this spring when tech stocks plummeted.
How Twitter and Musk deal with the existing funding package remains in flux. Twitter’s board and top management are cautious about agreeing new terms with the billionaire, said a person close to the social media company.
“We’re not adding any new contingencies,” the person said. “Security is what counts. Otherwise we go to court. We have all leverage, especially since he [Musk] already caved in.”
The judge overseeing the case has agreed to a brief delay in litigation to allow the parties to move forward with the transaction. Musk has stressed that closing the deal would depend on obtaining debt financing from the banks, which agreed to back the deal in April.
That request is a non-starter for Twitter, said several people briefed on the matter. In order for the two parties to move forward without a litigation, Musk needs to secure the money to close the deal as soon as possible. Otherwise, the social media group will prefer to let a court rule on the matter as the company is confident the judge will rule in its favour, these people said.
Twitter’s biggest fear is that Musk will try to find another way to get out of the deal at a later date, as some of the company’s directors are suspicious that its lenders could help him flounder on a deal. One possible avenue for the banks is to argue that once the social media platform was saddled with the new debt, it would be insolvent.
There is precedent for banks using the solvency of a buyout target as justification for not providing committed debt financing. In 2008, Huntsman Corporation sued Apollo after the private equity firm tried to exit its $11 billion acquisition of the chemical company, arguing that its banks would not provide the necessary debt.
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Huntsman sued Apollo, Credit Suisse and Deutsche Bank, ultimately opting for a multibillion-dollar payout.
In a filing filed Thursday in a Delaware court, Musk’s attorneys said each lender “is prepared to meet its obligations, subject to meeting the terms” in their debt commitment letters.
But Twitter responded that debt financing remained an issue. His attorneys referred to an affidavit from one of Musk’s lenders, who said the bank has yet to receive a customary request from the billionaire to borrow the $12.5 billion.
People close to the banks involved in the financing said that leaving was out of the question. Three bankers admitted their institutions would suffer a loss on the debt package, but the reputational damage if they pull out of funding – ahead of the potential legal risk – could be significant and they could find lucrative deals with large private equity firms in the future. customers cost.
“No one would trust us if we tried to do a dirty trick,” said a banker involved in the deal. “Do we want this to go away? Sure, but we’re well capitalized to deal with the hit.”
Additional reporting by Sujeet Indap and Joshua Franklin
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