The Twitter-Musk Deal drama is just beginning for Wall Street banks

Elon Musk is the new owner of Twitter Inc., ending months of uncertainty for Silicon Valley and its shareholders. Yet for Wall Street’s debt bankers, the drama is far from over, as they will have to convince investors that Chief Twit’s ambitions for the company can justify his heavy debt load.

With the $44 billion contract now closed, a Morgan StanleyThe company-led cohort that provided about $13 billion in debt financing to help fund the Twitter acquisition is now saddled with risky loans it never intended to keep in its books. Banks now face the unenviable task of selling it without making big losses – and it’s not going to be easy.

For starters, the cost of borrowing has skyrocketed.

Yields on junk bonds in the CCC tier, where Twitter’s riskiest unsecured debt would likely be rated, soared to 15.4%well above the 11.75% maximum interest rate the banks promised Musk on this part of the debt financing. It would force banks to offer steep discounts if they tried to offload to institutional investors at current rates, and they are liable for the difference — up to losses of more than $500 million for all debt.

Banks, and Musk himself, will also have to explain why Twitter’s bot problem isn’t a problem after all, and how the company can afford the huge annual interest charge that is almost $1.2 billion per year by an estimate. Without a quick turnaround plan and new sources of revenue and cost reductions, Twitter will burn money.

Read more: Morgan Stanley-led banks face $500 million loss on Twitter debt

A Morgan Stanley representative did not immediately respond to requests for comment.

Musk plans to take on the role of CEO of Twitter, taking the helm of the social media giant in addition to Tesla Inc. and SpaceX. Musk intends to replace Parag Agrawalwho was fired along with other important executives at the end of the takeover, Bloomberg reported.

The controversial deal, also funded with $33.5 billion of equity from Musk and other backers, has left many constituencies unhappy, including Twitter employees, some platform users in the world, and arguably Musk as well given the purchase price which now seems far too high given the stock market crash.

WATCH: Elon Musk has reportedly completed his $44 billion acquisition of Twitter Inc.

Source: Bloomberg

banking pain

Winning the mandate to support the acquisitive ambitions of the world’s richest man was supposed to be a coup in April. Morgan Stanley provided the largest commitment, followed by Bank of America Corp., Barclays Plcand Mitsubishi UFJ Financial Group Inc.

Representatives of the three banks declined to comment.

But then months of uncertainty over whether the deal would go ahead as Musk backtracked. And by the time he agreed to buy the San Francisco-based tech company in October, debt markets were in shock. Even though they could have tried to sell bonds and loans to help fund the deal, the banks barely had time to get the wheels rolling due to the October 28 deadline set by the court.

It is the largest so-called suspended deal for a leveraged buyout this year, and one of the largest on record. The Twitter deal is just one of many troubled LBO deals causing trouble on Wall Street in this latest cycle, albeit on a much smaller scale than during the Great Financial Crisis of 2007-2008, when banks faces an arrears of debt of more than 200 billion dollars.

Banks already have used about $30 billion of their own cash this year to fund loans for acquisitions and buyouts they couldn’t sell to investors, and Twitter’s addition to the pile brings that figure to more than $40 billion of dollars.

Read more: Banks grappling with $30 billion in unwanted debt in risk drain

Wall Street lenders also backed billions of dollars writedowns this year after central banks around the world began raising rates to tame inflation, pushing borrowing costs above the maximum interest rates they promised for mega-deals. Another group of banks realized about $600 million in losses for the takeover of Citrix Systems Inc. in September and were forced to hold about $6.5 billion in debt. Lenders backing the takeover of Nielsen Holdings Plc. were stuck with over $8 billion in debt.

Musk now has big plans for how he is going use twitter as the basis for a new “general purpose application”. After spending months lambasting the social media company over the bot issue and a whistleblower as he tried to pull out of the deal, Musk has now promised to help its bankers sell debt to fund managers.

Read more: Confused by Musk’s Twitter LBO? Here’s the weird thing: QuickTake

These potential buyers will focus on the health of Twitter as a business. Credit conditions have deteriorated in recent months amid high inflation, rapidly rising rates and fears of recession. With buy-side demand constrained, banks now find themselves as direct creditors of the social media platform, rather than temporary bridge financing providers, as is usually the case.

The lenders originally planned to sell $6.5 billion in leveraged loans to investors, along with $6 billion in junk bonds split evenly between secured and unsecured notes. They also provided $500 million of a type of loan called a revolving credit facility that they generally planned to hold themselves, although it was unclear whether or not this was drawn at the close of the deal. ‘OK.

Eventually, when the markets calm down, the banks will likely try to sell at least some of the debt to investors, which will eventually allow them to realize those losses, unless there is a large and unexpected rebound in the market. market risk appetite.

To contact the reporter on this story:
Paula Seligson in New York at [email protected]

To contact the editors responsible for this story:
Natalie Harrison to [email protected]

Sid Verma

© 2022 Bloomberg LP All rights reserved. Used with permission.

Comments are closed.