When banks led by Morgan Stanley agreed to assist finance Elon Musk’s purchase of Twitter Inc. in April, they were eager to support a significant customer, the world’s richest person. Neither Musk nor the banks have an apparent route out of this.
Lenders such as Bank of America Corp., Barclays Plc, and Mitsubishi UFJ Financial Group Inc. have agreed to provide $13 billion in debt financing for the transaction. According to Bloomberg calculations, their losses would be $500 million or more if the debt were sold now. According to public records and lawyers who have reviewed them, they committed to fund the purchase whether or not they were able to unload the debt to outside investors.
Since April, junk bond and leveraged loan yields have risen, implying that banks will lose money by agreeing to offer funding at lower levels than the market will take currently. Any pain felt by banks as a result of this transaction comes on top of billions of dollars in writedowns and losses this year as central banks around the world began raising interest rates to combat inflation.
Even if the banks could find buyers for Twitter debt in the market right now, which is far from probable, selling bonds and loans connected to the deal would most likely be impossible before the purchase is completed.
According to Deutsche Bank AG estimates, banks have a pipeline of roughly $50 billion in debt financings pledged to supply in the next months. While banks would normally sell bonds and loans to fund those transactions, investors are less inclined to buy today than they were at the start of the year, and discharging this debt will be difficult.
As a result, banks are being forced to provide their own financing on a number of transactions, putting a burden on their profitability and capital requirements. According to Bloomberg, lenders such as Bank of America and Barclays expect to have to provide $8.35 billion in loans for Nielsen Holdings’ leveraged takeover next week.
Morgan Stanley, Bank of America, Barclays, MUFG, and Twitter declined to comment. Musk’s spokesperson did not immediately respond to a request for comment.
Is there an exit?
Banks may not be able to withdraw from the Twitter arrangement, but Musk has been attempting to do so. On Thursday, Twitter stated that it is skeptical of the billionaire’s claims to complete the acquisition. A banker involved in the debt financing testified earlier Thursday that Musk had failed to send them a borrowing notice and had otherwise not signaled to them that he intended to conclude the deal, according to the company.
The absence of a borrowing notice isn’t always a concern. According to David Wicklund, a lawyer at Vinson & Elkins who concentrates on the complex acquisition and leveraged financings, that document usually occurs near the end of the process of closing on a purchase. It is frequently sent to banks two or three days before closing, making it one of the last items completed.
However, the period leading up to the conclusion of a large acquisition is often marked by a deluge of documentation that must be handled by both parties. Wicklund estimates that 50 to 80 documents will be discussed.
A Delaware court warned on Thursday that if the transaction is not completed by October 28, she will reschedule the Twitter-Musk dispute for November. That deadline is based on a document from Musk’s team, which stated that the banks needed until then to secure debt money.
Musk announced on Twitter on Monday that he will proceed with his acquisition “pending receipt of the proceeds of the debt financing.” This gave the impression that there was some concern about whether the banks would supply the promised finance, which created a stumbling point in the company’s negotiations with the billionaire.
Musk’s team, though, stated in a court declaration on Thursday that counsel for the banks “has advised that each of their clients is prepared to honor its obligations.”
Junk Bonds and loans
Originally, the banking group planned to offer $6.5 billion in leveraged loans to investors, as well as $6 billion in junk bonds split evenly between secured and unsecured notes. They are also contributing $500 million in the form of a revolving credit facility, which they would normally retain themselves.
According to Bloomberg, of the more than $500 million in losses that banks are anticipated to have on Twitter debt, up to $400 million derives from the riskiest element, the unsecured bonds, which have a maximum interest rate for the firm of roughly 11.75%. The losses do not include the fees that the banks would normally gain on the transaction.
The remaining losses are anticipated based on where the maximum interest rates for the loan and secured bond would have been established when contrasted to the unsecured portion. The predicted loss could be higher or lower in the end.
The banking group is anticipated to hand Twitter the funds and become a lender to the soon-to-be heavily indebted social media powerhouse.
According to the debt commitment letter, Morgan Stanley would carry the most debt, totaling around $3.5 billion:
Banks will have to mark down the debt depending on where it would trade in the secondary market, which would almost certainly be at substantial discounts to face value, particularly for the riskiest components. BNP Paribas, Mizuho, and Societe Generale SA did not respond. The banks can then wait until market circumstances improve before attempting to sell the debt to investors at a later date, most likely at a discount to face value.
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