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Banks financing Musk's Twitter deal face hefty losses

Published 10/04/2022, 11:05 PM
Updated 10/05/2022, 10:57 AM
© Reuters. FILE PHOTO: Tesla Motors CEO Elon Musk speaks during the Model S Beta Event held at the Tesla factory in Fremont, California October 1, 2011. REUTERS/Stephen Lam

By Anirban Sen

(Reuters) -Elon Musk's U-turn on buying Twitter Inc (NYSE:TWTR) could not have come at a worse time for the banks funding a large portion of the $44 billion deal and they could be facing significant losses.

As in any large acquisition, banks would look to sell the debt to get it off their books. But investors have lost their appetite for riskier debt such as leveraged loans, spooked by rapid interest rate hikes around the world, fears of recession and market volatility driven by Russia's invasion of Ukraine.

While Musk will provide much of $44 billion by selling down his stake in electric vehicle maker Tesla (NASDAQ:TSLA) Inc and by leaning on equity financing from large investors, major banks have committed to provide $12.5 billion.

They include Morgan Stanley (NYSE:MS), Bank of America Corp (NYSE:BAC) and Barclays (LON:BARC) Plc.

Mitsubishi UFJ (NYSE:MUFG) Financial Group Inc, BNP Paribas (OTC:BNPQY) SA, Mizuho Financial Group Inc and Societe Generale (OTC:SCGLY) SA 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 poor for the banks trying to sell the debt.

The Twitter debt package is comprised 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 to the wall - they have no choice but to finance the deal."

Leveraged financing sources have also previously told Reuters that potential losses for Wall Street banks involved in the Twitter debt in such a market could run to 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 cancel efforts to sell $3.9 billion of debt that financed Apollo Global Management (NYSE:APO) Inc's deal to buy telecom and broadband assets from Lumen Technologies Inc.

That came on the heels of a group of banks having to take a $700 million loss on the sale of about $4.55 billion in debt backing the leveraged buyout of business software company Citrix Systems Inc (NASDAQ:CTXS).

"The banks are on the hook for Twitter — they took a big loss on the Citrix deal a few weeks ago and they’re facing an even bigger headache with this deal," said Chris Pultz, portfolio manager for merger arbitrage at Kellner Capital.

© Reuters. Twitter logo and stock graph are seen through a magnifier displayed in this illustration taken September 4, 2022. REUTERS/Dado Ruvic/Illustration

Banks have been forced to pull back from leveraged financing in the wake of Citrix and other deals weighing on their balance sheet and that is unlikely to change anytime soon.

The second quarter also saw U.S. banks start to take a hit on their leveraged loans' exposure as the outlook for dealmaking turned sour. Banks will begin reporting third-quarter earnings next week.

Latest comments

I have problems in feeling sorry for the banks who agreed to lean this mo..ron money to buy twitter at 54.
Only Id.iots like Musk gets painful costly lessons. Now buying TWTR for like 4 times its fair price. LoL. Unfotunately, Tesla shareholders will suffer his nonsense acts.
Musk's arrogance and superiority complex, has finally showed the world what he really is all about, and how stupid he can be.
Musk going to "own the libs" literally!
Twitter is "the libs"??? I thought it was social media and mostly younger people.
nah dude twitter is a controlled playground run by progressive bullies. Most of twitter is fake bot accounts run by bot farms so people can buy followers. Its a charade and not a representation of real humans.
Musk is some kind of genius then.
It's interesting to see what Elon has been doing these past few years
It's clear that it's a plan business strategy
musk was dumping tesla and is now pumping twitter? the shaky banks in this syndicate will pay the price of their fully, and will be the first banks to collapse during the downturn! good luck to yous!
I wonder if he even knows he is the A C .....
What a trainwreck of a deal!
Not for this shareholder $TWTR
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