Musk’s plan to buy Twitter has alarmed policymakers around the world.
Joe Skipper | Reuters
Elon Musk’s turn to buy Twitter couldn’t have come at a worse time for the banks that fund much of it $44 billion deal and they could face significant losses.
As with any major acquisition, the banks would look to sell the debt to get it off their books. But investors have lost appetite for riskier debt such as leveraged loans, spooked by rapidly rising interest rates around the world, recession fears and market volatility over Russia’s invasion of Ukraine.
While Musk will provide a whopping $44 billion by selling his stake in electric vehicle maker Tesla and relying on equity financing from major investors, major banks have committed to providing $12.5 billion.
They include Morgan Stanley, Bank of America and Barclays.
Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho Financial Group and Societe Generale are also part of the syndicate.
Noting other recent high-profile losses for banks in leveraged financing, more than 10 bankers and industry analysts told Reuters the outlook was bleak for banks trying to sell debt.
The Twitter’s debt package consists of $6.5 billion in leveraged loans, $3 billion in secured bonds and another $3 billion in unsecured bonds.
“From the banks’ perspective, this is less than ideal,” said Wedbush Securities analyst Dan Ives. “The banks have their backs against the wall – they have no choice but to fund the deal.”
Sources of leveraged finance also told Reuters that potential losses for Wall Street banks involved in Twitter’s debt in such a buyout could run into the hundreds of millions of dollars.
Societe Generale did not respond to a request for comment, while the other banks declined to comment. Twitter also declined to comment. Musk did not immediately respond to a request for comment.
Just last week, a group of lenders had to scrap efforts to sell $3.9 billion in debt that financed Apollo Global Management’s deal to buy telecom and broadband assets from Lumen Technologies.
That’s when a group of banks had to take a $700 million loss on the sale of about $4.55 billion in debt backing its leveraged buyout of business software company Citrix Systems.
“Banks are on the hook for Twitter — they took a big loss from the Citrix deal a few weeks ago and are facing an even bigger headache with this deal,” said Chris Pultz, merger arbitrage portfolio manager at Kellner Capital.
Banks have been forced to pull back from leveraged finance in the wake of Citrix and other deals weighing on their balance sheets, and that’s unlikely to change anytime soon.
In the second quarter, US banks also began to take a hit on their leveraged loan exposure as the outlook for closing deals turned unfavorable. Banks will begin reporting third-quarter earnings next week.