Elon Musk’s banks, faced with massive losses on their pledge to finance the $44 billion takeover of Twitter Inc (TWTR.N), may not be able to walk away from the deal easily but they might have a way to reduce the hit they take.
Morgan Stanley (MS.N), Barclays Plc (BARC.L), Bank of America Corp (BAC.N), and Mitsubishi UFJ Financial Group Inc (8306.T) led a $13 billion financing for the bid by Musk, the world’s wealthiest man and CEO of SpaceX and Tesla Inc (TSLA.O).
Often, banks would sell the debt to investors and collect an underwriting fee. But the terms of the financing were agreed on in April when Musk first put in an offer for Twitter and the market for such debt has collapsed ever since. That means if banks sought to sell the debt now, they would have to do so at a loss to convince investors to take it off their hands.
Banks could, however, attempt to cut their losses by increasing the amount of debt that is secured by collateral so that it is less risky, holding a larger portion of it on their balance sheets, and minimizing the amount they have to sell to investors in the future, according to six debt capital market investors and bankers.
Two people conversant with the thinking of the banking syndicate mentioned Wall Street’s experience with the financing provided to fund the buyout of business software company Citrix Systems Inc (CTXS.MX) as a probable model.
In that case, Wall Street companies eventually took a loss of about $700 million after selling $8.55 billion of bonds and loans but avoided an even heftier loss by tweaking the package, the investors and market sources said.
But they would require Musk’s approval for any rejig of the financing structure, and there is no assurance he would accept, they said. Reuters could not establish whether banks had reached out to Musk with a proposal.
Morgan Stanley, Bank of America, Barclays, BNP Paribas (BNPP.PA), MUFG, Societe Generale (SOGN.PA), and Mizuho refused to comment. Representatives for Twitter and Musk failed to respond to requests for comment.
The discussion, currently a subject of debate among debt investors and investment bankers, provides a window into the havoc caused on Wall Street by Musk’s U-turn last week. After taking part in a weeks-long court battle attempting to back out of it, Musk suddenly decided he would conclude his deal on the original terms.
Musk, however, conditioned his proposal on his ability to acquire debt financing and now has until Oct. 28 to conclude the transaction.
Roberta Goss, head of bank loan and collateralized loan obligations platform for investment manager Pretium Partners, said any financing is “going to be a hard sell” with investors because the amount of debt being taken on is nearly seven times Twitter’s 2022 expected profits of $2 billion, causing it to be very risky.
Musk would have an advantage in any talks with the banks. Goss stated:
“It is currently out of the money for banks and in the money for Musk.”
A Variety Of Options
The debt financing package consists of leveraged loans, which are risky due to the amount of debt the company is putting on, together with secured and unsecured bonds.
Any debt sale to a large investor pool would need credit ratings from the top three rating agencies, Moody’s Investors Services, Fitch, and S&P. Moody’s senior analyst Neil Begley said banks have not yet reached out to his firm for such ratings.
Begley stated:
“If the bank group is looking for a deal to syndicate, they often pursue credit ratings because it acts like a passport to the debt capital markets, but we have not heard from them as yet.”
Normally, such ratings are pursued two to three weeks ahead of a debt sale to give the agencies time, but Begley said a shorter turnaround was likely given his firm gave a Ba2 rating to Twitter when it previously issued bonds in February.
Begley said the fact that banks had not approached them until now could also be a sign they were considering holding on to the debt until the markets improve.
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“If the debt commitments are really hard-wired here then banks may have to consider delaying debt syndication plans if the market has no appetite for highly levered transactions, so it wouldn’t make sense to come and see us with urgency.”
Package Tweak For The Twitter Deal
Banks could hold more debt on their books by turning some unsecured debt into loans secured by a pledge of collateral, or second-lien loans, and consider selling a larger portion of Term Loan A’s (TLA), several high-yield investors and bankers said.
TLA is seen to be a fairly safer class of debt that is held by the lenders themselves.
In September, banks financing the Citrix buyout took on a similar restructuring. They avoided greater losses by including a TLA component to the package, according to one of the sources who has knowledge about the Citrix deal.
The banks also sold a smaller portion of Term Loan B’s, a riskier category of debt, to institutional investors, and turned almost $4 billion of the package into a second-lien loan that was held on their books as they waited for more suitable market conditions, the source said.
