A group of banks led by Morgan Stanley that agreed to provide Elon Musk with $13 billion of debt financing for his acquisition of Twitter Inc. would risk taking a hit if they had to offload the financing to investors in the current risk-off market climate.
The lenders forged a deal with Musk based on a maximum interest rate of 11.75% for the $3 billion unsecured portion of the financing package, which is expected to be replaced by a bond with ratings in the CCC tier, according to a person with knowledge of the matter. Yet the average yield on similarly rated junk securities soared past 12% last week as investors pulled back from risk amid fears over rampant inflation, a potential recession and the war in Ukraine.
Selling the debt at a yield above 11.75% would force the banks to incur a hit on the fees they will earn for underwriting the transaction, and could result in outright losses if the rate climbs above 12.125%, said the person, who asked not to be identified when discussing a private transaction.
Representatives for Morgan Stanley and the other members of the underwriting group — Bank of America Corp., Barclays Plc, Mitsubishi UFJ Financial Group Inc., BNP Paribas SA, Mizuho Financial Group Inc. and Societe Generale SA — declined to comment. Representatives for Musk’s family office and Twitter did not immediately respond to requests for comment.
The banks are under no pressure to offload any of the financing right now. Market conditions may improve over the coming months and even taking a loss on a portion of the deal does not necessarily make the entire financing unprofitable for the lenders. Adding to the uncertainty, Musk has repeatedly cast doubt over whether the acquisition will be completed, even though the parties had agreed to do so this year.
The Twitter buyout is one of the few pending acquisitions that was underwritten with large built-in buffers for banks and maximum rates guaranteed to borrowers, known as caps, well into the double digits for unsecured debt. Other financings including the buyout of Citrix Systems Inc., which were committed to earlier in the year when market conditions were less punishing, are at risk of saddling banks with much steeper losses, Bloomberg previously reported.
Banks who agreed to finance Musk’s bid for Twitter have also taken comfort from the large amount of equity that is part of the overall financing. Musk is dropping plans to partially fund his purchase of Twitter with a margin loan tied to his Tesla stake and has boosted the size of the deal’s equity component to $33.5 billion, according to a regulatory filing Wednesday.
Yields on bonds with CCC ratings, the lowest rung of junk, soared near 12.4% on Monday, their highest since around July 2020, before dipping back to 11.95% on Wednesday, according to data compiled by Bloomberg. Appetite for new issues, meanwhile, has seized up, forcing borrowers with pending acquisitions to look at the private credit market to provide at least some of the debt to finance planned buyouts.