Why Morgan Stanley and other banks arranging the Musk-Twitter deal face a $500m loss

The lenders stand to lose money from having agreed to provide financing at lower yields than the market will accept now

Morgan Stanley and other banks were eager to help Elon Musk, a very important client, with his acquisition of Twitter, but now no one has an obvious way to wriggle out of it. Reuters

When banks led by Morgan Stanley agreed in April to help finance Elon Musk’s purchase of Twitter, they were eager to aid an important client, the richest person in the world. Now neither Mr Musk nor the banks have an obvious way to wriggle out of it.

Lenders that also include Bank of America, Barclays and Mitsubishi UFJ Financial Group committed to provide $13 billion of debt financing for the deal. Their losses would amount to $500 million or more if the debt were to be sold now, according to Bloomberg calculations.

They agreed to fund the purchase whether or not they were able to offload the debt to outside investors, according to public documents and lawyers who have looked at them.

“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, a partner at law firm Moses Singer.

But Mr Fischer, a former senior trial counsel at the Securities and Exchange Commission who isn’t involved in Twitter, said there’s no legal basis for them to back out.

Junk bond and leveraged loan yields have surged since April, meaning that banks will lose money from having agreed to provide financing at lower yields than the market will accept now.

Any pain the banks bear from this deal comes as lenders have already sustained billions of dollars of writedowns and losses this year after central banks worldwide have started hiking rates to tame inflation.

Even if the banks could find buyers for Twitter debt in the market now, which is far from certain, selling bonds and loans tied to the deal probably wouldn’t be possible before the buyout closes.

Banks have a pipeline of about $50bn of debt financing they’ve committed to provide in the coming months, according to Deutsche Bank estimates. While usually banks would sell bonds and loans to fund those deals, investors are less eager to buy now than they were towards the beginning of the year, and offloading this debt will be hard.

That’s forcing banks to provide the financing themselves on a number of deals, a strain on their earnings and capital requirements. For example, lenders including Bank of America and Barclays expect to have to fund $8.35bn of debt for the leveraged buyout of Nielsen Holdings next week, Bloomberg reported on Tuesday.

Representatives for Morgan Stanley, Bank of America, Barclays, MUFG and Twitter declined to comment. A representative for Mr Musk did not immediately respond to a request for comment.

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Mr Musk answers questions at the Qatar Economic Forum. Bloomberg

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Banks may not be able to back out of the Twitter deal, but Mr Musk has been trying to. Twitter said on Thursday that it's dubious of the billionaire’s promises to close on the transaction.

The company said that a banker involved in the debt financing testified earlier on Thursday that Mr Musk had yet to send them a borrowing notice, and had otherwise not communicated to them that he intended to close the deal.

The lack of a borrowing notice on its own isn’t necessarily a problem. Usually that document comes towards the end of the process of closing on a purchase, said David Wicklund, a partner at Vinson & Elkins who focuses on complex acquisition and leveraged financing.

It’s often submitted to banks two or three days before closing, making it one of the last items to be finished.

But leading up to the closing of a big acquisition typically involves a blizzard of paperwork that has to be negotiated between both parties. There may be 50 to 80 documents that get discussed, Mr Wicklund said.

A Delaware judge said on Thursday that if the transaction isn’t done by October 28, she will set new dates in November for the lawsuit between Twitter and Mr Musk. That date comes from a filing from Mr Musk’s team that said the banks needed until then to provide the debt funding.

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

Howard Fischer,
partner at Moses Singer

On Monday, Mr Musk sent Twitter a letter saying he would go through with his acquisition “pending receipt of the proceeds of the debt financing". That made it seem like there was some doubt as to whether the banks would provide their promised financing, which became a sticking point in negotiations between the company and the billionaire.

But in a court document on Thursday, Mr Musk’s team said that lawyers for the banks “has advised that each of their clients is prepared to honour its obligations".

The banking group originally planned to sell $6.5bn of leveraged loans to investors, along with $6bn of junk bonds split evenly between secured and unsecured notes. They are also providing $500m of a type of loan called a revolving credit facility that they would typically plan to hold themselves.

Of the more than $500m of losses that the banks are estimated to have on the Twitter debt, up to about $400m stems from the riskiest portion, the unsecured bonds, which have a maximum interest rate for the company of about 11.75 per cent, Bloomberg reported earlier this year. The losses exclude fees the banks would usually earn on the transaction.

The rest of the losses are estimated based on where the maximum interest rates would have been determined for the loan and secured bond when compared to the unsecured portion. The expected loss could ultimately be higher or lower.

The banking group is expected to give the cash to Twitter and become a lender to the soon-to-be highly-indebted social media giant. Morgan Stanley would hold onto the most at about $3.5bn of debt, based on the debt commitment letter.