When several banks headed by Morgan Stanley agreed to assist fund Elon Musk’s acquisition of Twitter Inc. in April, the banks were keen to assist an important customer, the world’s wealthiest person.
Currently, however, neither the banks involved nor Musk himself seems to possess any effective way to get out of this.
Lenders such as Bank of America Corp., Barclays Plc, and Mitsubishi UFJ Financial Group Inc. have committed to providing $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. According to public documents and lawyers who have reviewed them, they agreed to fund the purchase whether or not they could offload the debt to outside investors.
“I think that those banks would like to get out of it, I think the deal makes less sense for them now, and that the debt will be harder to syndicate to investors,” said Howard Fischer, partner at law firm Moses Singer.
However, Fischer, a former top trial counsel at the Securities and Exchange Commission (SEC) of the United States who is not affiliated with Twitter, believes there is no legal justification for them to withdraw.
Since April, junk bond and leveraged loan yields have risen, implying that banks will lose money by agreeing to provide financing at lower yields than the market will accept now. Any pain felt by banks as a result of this deal comes on top of billions of dollars in writedowns and losses this year as central banks worldwide 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 certain, selling bonds and loans tied to the deal would most likely be impossible before the buyout is completed.
Deutsche Bank AG estimates that banks have a pipeline of around $50 billion in debt financings committed to providing in the coming months. While banks normally sell bonds and loans to fund those transactions, investors are less eager to buy now than at the start of the year, and offloading this debt will be difficult.
As a result, banks are forced to provide their financing on some transactions, putting a strain on their earnings and capital requirements. According to Bloomberg, lenders such as Bank of America and Barclays expect to have to fund $8.35 billion in debt for Nielsen Holdings’ leveraged buyout 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.
Banks may be unable to withdraw from the Twitter deal, but Musk has attempted to do so. On Thursday, Twitter stated that it is sceptical of the billionaire’s promises to complete the transaction.
A banker involved in the debt financing testified earlier Thursday that Musk had yet to send them a borrowing notice and had otherwise not communicated to them that he intended to close the deal, according to the company.
The absence of a borrowing notice isn’t always a problem. According to David Wicklund, a partner at Vinson & Elkins who focuses on the complex acquisition and leveraged financings, that document usually comes near the end of closing on a purchase. It is frequently submitted to banks two or three days before closing, making it one of the last items completed.
However, the period leading up to the closing of a large acquisition is typically marked by a deluge of paperwork that both parties must negotiate. Wicklund estimates that 50 to 80 documents will be discussed.
A Delaware judge said on Thursday that she would reschedule the Twitter-Musk lawsuit for November if the transaction is not completed by October 28. That date is based on a filing from Musk’s team, which stated that the banks needed until then to provide debt funding.
Musk announced on Twitter on Monday that he would proceed with his acquisition “pending receipt of the proceeds of the debt financing.”
This gave the impression that there was doubt whether the banks would provide the promised financing, which became a sticking point in the company’s negotiations with the billionaire.
Musk’s team, however, stated in a court document on Thursday that counsel for the banks “has advised that each of their clients is prepared to honour its obligations.”
Originally, the banking group planned to sell $6.5 billion in leveraged loans to investors and $6 billion in junk bonds split evenly between secured and unsecured notes. They also provide $500 million as a revolving credit facility they would normally hold.
According to Bloomberg, of the more than $500 million in losses that banks are estimated to have on Twitter debt, up to $400 million stems from the riskiest portion, the unsecured bonds, which have a maximum interest rate for the company of about 11.75%. The losses do not include the fees the banks normally would earn on the transaction.
The remaining losses are estimated based on where the maximum interest rates for the loan and secured bond would have been determined compared to the unsecured portion. The expected loss could be higher or lower in the end.
The banking group is expected to give Twitter the funds and become a lender to the soon-to-be heavily indebted social media giant.
According to the debt commitment letter, Morgan Stanley would hold the most debt, totalling approximately $3.5 billion:
Banks will have to mark down the debt based on where it would trade in the secondary market, which will almost certainly be at steep discounts to face value, particularly for the riskiest portions. BNP Paribas, Mizuho, and Societe Generale SA did not respond. The banks can wait until market conditions improve before attempting to sell the debt to investors later, most likely at a discount to face value.