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The banks could sell the leveraged loans, but only at a big loss. Some have already written them down by hundreds of millions of dollars.
By Wolf Richter for WOLF STREET.
When Elon Musk bought Twitter in a leveraged buyout for $44 billion in October 2022 – after he’d walked away from the deal, after which Twitter had sued him to force him to stick to the deal – he and other investors put in about $30 billion, and the acquiring holding company borrowed another $13 billion in junk-rated variable-rate high-risk loans from seven banks. Those banks had intended to sell those leveraged loans right away because they’re too risky to carry on their balance sheet.
But that was 22 months ago, and the banks are still stuck with those loans and haven’t been able to sell them without taking massive losses on them.
The seven banks are Morgan Stanley, Bank of America, Barclays, Mitsubishi UFJ Financial Group (MUFG), BNP Paribas, Mizuho, and Société Générale. Obviously, doing business with the richest man in the world and getting a foot into the door with his six companies, and perhaps an IPO or two, such as SpaceX or Starlink, and the fee bonanza that would come with them, were huge incentives to engage in this risky deal.
This loan package has now turned into the biggest hung deal by dollar amounts of all times, Steven Kaplan, a finance professor at the University of Chicago who has tracked such deals since the 1980s, told the WSJ.
According to data from PitchBook LCD, which has data going back through the Financial Crisis, the X loans have been hung longer than every similar unsold deal since the Financial Crisis. Only one hung deal from the Financial Crisis was bigger, at $20 billion, but it was hung for only 12 months before the company filed for bankruptcy, according the WSJ.
The biggest portion of the $13 billion in loans is a $6.5 billion secured seven-year term loan that carries the highest priority for repayment. The floating-rate loan’s interest rate is based on the Secured Overnight Financing Rate (SOFR) plus 4.75%.
There is also a revolving line of credit of up to $500 million, priced at SOFR plus 4.5%.
Then there are also two bridge loans – short-term loans that are supposed to be repaid a few months after the leverage buyout closed, but that haven’t been repaid. The first is a secured $3 billion bridge loan, initially with a fixed rate of 6.75%. The second is an unsecured $3 billion bridge loan, the riskiest portion of the package, that comes with a rate of SOFR plus 10%. Both bridge loans trigger an additional 0.5% interest for each quarter that they’re not repaid.
Back in April 2022, when the original lending agreements were worked out, and the Fed had just hiked for the first time in this cycle, SOFR was 0.33%, and no one expected for the Fed to hike to 5.25-5.50%. But by October 2022, when the deal closed, SOFR was 3.03%. Since the last rate hike in July 2023, SOFR has been about 5.33%.
And X’s debt has become massively expensive: Since the last rate hike in July 2023, the interest rate on the $6.5 billion term loan has been over 10% (4.75% plus 5.33% SOFR). The unsecured bridge loan’s interest rate has been over 15%.
So Musk’s statement that X faces $1.5 billion in annual interest charges just about hit the mark.
Meanwhile, back at the ranch, Musk managed to eviscerate X’s cash flow by verbally whipping advertisers and chasing them out the exits, and then by suing them, alleging that they conspired to boycott his personal toy.
So obviously, the banks, sitting on this $13 billion in leverage loans are nervous. The $30 billion that the investors put into the deal serves as a security blanket – but still.
The value of X isn’t $44 billion, which is part of the problem for banks. Musk himself said he overpaid. In October 2023, X Corp. told employees that stock grants would be priced at $45 a share, which translated into a valuation of the company of about $19 billion, according to the WSJ at the time. Earlier that year, Musk had told employees they would receive stock grants based on a valuation of about $20 billion.
So it has been 22 months that these seven banks have sat on those $13 billion in leveraged loans. They could sell them at a big loss and get rid of the risks. Or they can hold of to them and collect the big-fat interest and deal with the consequences of having this much risk on their balance sheet – and that’s what they’ve been doing, sitting on them, collecting interest, hoping for better days, dealing with regulatory scrutiny, and praying, “Oh Elon, please don’t default, and please repay the loans when they mature.”
Some of the banks have written down the loans by hundreds of millions of dollars, according to the WSJ. They could recoup the write-downs if the loans pan out.
According to sources cited by the WSJ, earlier this year, banks discussed restructuring the loans, where Musk would put in more money and pay down the loans, and in return the banks would lower the interest rates. But X didn’t follow through on the plan, the sources said.
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The post Banks Still Stuck with $13 Billion in Risky Loans from Musk’s LBO of Twitter 22 Months Ago, Possibly the Longest Hung Deal of this Size Ever appeared first on Energy News Beat.
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