Analysis-Musk’s banks may have a way to cut losses from Twitter deal

Morgan Stanley, Bank of America Corp, Barclays Plc and Mitsubishi UFJ Financial Group Inc led a $13 billion funding bid for Musk, the world’s richest man and chief executive of Tesla Inc and SpaceX.

Normally, banks sell the debt to investors and pocket an underwriting fee. But the terms of the funding were set in April when Musk made an offer for Twitter, and the market for such debt has since collapsed. This means that if the banks tried to sell the debt now, they would have to do so at a loss to entice investors to take them over.

Banks could, however, try to minimize their losses by increasing the amount of debt unsecured by collateral so that it is less risky, keeping more of it on their balance sheets, and reducing the amount they have to sell to investors. term, according to half a dozen bankers and debt capital market investors.

Two people familiar with banking syndicate thinking pointed to Wall Street’s experience with the funding provided to fund the takeover of enterprise software company Citrix Systems Inc as a possible model.

In this case, Wall Street firms ended up taking a loss of about $700 million after selling $8.55 billion in loans and bonds, but saw an even bigger loss by changing the structure. , according to market sources and investors.

But they would need Musk’s approval for any changes to the funding structure, and there’s no guarantee he would agree, they said. Reuters could not determine whether the banks had approached Musk with a proposal.

Morgan Stanley, Barclays, MUFG, Bank of America, Socit Generale, Mizuho and BNP Paribas declined to comment. Representatives for Musk and Twitter did not respond to requests for comment.

Chart: Elon Musk vs. Twitter (

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The debate, currently the subject of conversation among investment bankers and debt investors, offers a window into the havoc wrought on Wall Street by Musk’s about-face last week.

After engaging in a weeks-long court battle to try to get out, Musk abruptly decided that he would go through with his deal on the original terms.

Musk, however, has made his proposal conditional on his ability to secure debt financing and now has until October 28 to close the deal.

Roberta Goss, head of the bank lending and secured loan bond platform for investment manager Pretium Partners, said any funding “will be a tough sell” to investors because the amount of debt is almost seven times greater. to Twitter’s $2 billion earnings forecast for 2022, making it very risky.

Musk would have the upper hand in any negotiations with the banks. “It’s currently out of the money for the banks and in the money for Musk,” Goss said.

VARIOUS OPTIONS

The debt financial package includes leveraged loans, which are risky due to the amount of debt the business takes on, as well as secured and unsecured bonds.

Any sale of debt to a large group of investors would require credit ratings from the three major rating agencies, Moody’s Investors Services, S&P and Fitch. Moody’s senior analyst Neil Begley said banks have yet to approach his company for such ratings.

“If the banking group is looking for a syndicated deal, they often look for credit ratings because that acts as a passport to the debt capital markets, but we haven’t heard of them yet,” Begley said.

Usually, such ratings are requested two to three weeks before a debt sale to give agencies time, but Begley said a shorter deadline was possible given that his company gave Twitter a Ba2 rating on its last show. of bonds in February.

Begley said the fact that the banks have not contacted them so far could also be a sign that they plan to hold on to debt until markets improve.

“If debt covenants are really wired here, banks might have to consider delaying debt syndication plans if the market has no appetite for high-leverage deals, so it wouldn’t make sense to come and see us urgently,” he said.

PACKAGE TWEAK

Banks could hold more debt on their books by converting some unsecured debt into junior loans, or loans secured by collateral, and seek to sell more Term A (TLA) loans, several bankers and investors said. high yield.

TLA is considered a relatively safer category of debt, held by the creditors themselves.

In September, the banks financing the Citrix takeover undertook a similar restructuring. They saw bigger losses by adding a TLA component to the package, according to one of the sources familiar with the Citrix operation.

The banks also sold a smaller portion of Term B loans, a riskier debt category, to institutional investors, and converted nearly $4 billion of the package into a second lien loan that was retained on their books in waiting for more favorable market conditions, the source said.

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