If Elon Musk follows through with his Twitter deal, the banks supporting him are in a worse position than when the deal was originally made.
Key Details
- Elon Musk has officially reverted back to his original offer to buy Twitter for $54.20 a share—for a total of $44 billion.
- Banks have recently been struggling to offload billions of dollars in buyout debt they committed to in better times and Musk’s turn of events has just added fuel to the fire.
- Now, bankers may struggle to sell the risky Twitter buyout debt just as credit markets begin to crack. With yields at multi year highs, they’re potentially on the hook for hundreds of millions of dollars of losses on the unsecured portion alone should they try to unload it to investors, according to Bloomberg writers Olivia Raimonde and Paula Seligson.
Why it’s news
Elon Musk first offered to buy Twitter in April for $54.20 a share or $44 billion. Since the initial offer there have been many twists and turns eventually leading to Musk attempting to abandon the deal.
After a long battle Musk now has agreed to go back to his original deal, but the economy has changed dramatically since the original deal was agreed upon and now banks will have to fight for the funding or lose a lot of money.
While Musk will provide much of $44 billion by selling down his stake in electric vehicle maker Tesla and by leaning on equity financing from large investors, major banks have committed to provide $12.5 billion. They include Morgan Stanley, Bank of America, and Barclays.
The banks committed debt financing for the deal back in April, with the intention to sell most of that to institutional investors.
As the economy continues to head down a bad path, investors are being very cautious about where they put their money making it not look good for bankers.
“Given the incremental company specific news flow since the deal was agreed to—combined with the meaningful deterioration in the economy—lenders will be very hesitant to provide financing.” says portfolio manager at Brandywine Global Investment Management, John McClain.
The banks were already facing big losses considering they promised a maximum interest rate of about 11.75% on the unsecured bond portion but CCC debt now trades on average at around 15%, according to Bloomberg data.
The deal has not yet been sealed, but it most likely will soon leave banks a small amount of time to get money.
Backing up a Bit
The timeline between Elon Musk and Twitter is a lengthy one.
In April, Elon Musk announced that he held a 9.2% stake in Twitter, which made him the social-media company’s largest shareholder. Twitter’s stock price soared 25% after the announcement.
Later that month, the billionaire entrepreneur offered to buy all of Twitter at $54.20 per share—equaling about $44 billion. He said he originally invested in the platform because he believes it is failing in its potential to be the leading platform for free speech around the globe. In fact, he asked his 2 million followers if Twitter adhered to principles of free speech, and 70% said “no.”
Last month, Musk decided to back out of the deal, claiming there were too many fake accounts on the platform. Twitter has since sued Musk in Delaware Court of Chancery to complete the deal and requested the trial to take place in September. Musk, on the other hand, wanted to delay the trial until February 2023, stating that a case of this size takes time to prepare. Twitter was granted its wish of an expedited trial, with Chancellor Kathaleen McCormick, the presiding judge, setting a five-day trial for October. Musk then countersued Twitter, stating his reason for the termination was due to Twitter not being upfront about the number of fake accounts on the platform.
Then, Elon Musk and his legal team subpoenaed Twitter’s founder and former CEO Jack Dorsey, to get him to release documents that provide accurate information on bots and spam accounts on the social-media platform and now these documents have come out from Zatko and Musk and his lawyers have subpoenaed him as well. Then, Musk’s text messages were revealed in court filings and it showed that Twitter co-founder Jack Dorsey tried to facilitate Musk’s Twitter takeover, which led to Musk officially reverting back to his original deal to buy the social media company.