Musk’s plan to buy Twitter has alarmed policymakers around the world.
Joe Skipper | Reuters
Elon Musk’s U-turn on purchases Twitter couldn’t have come at a worse time for banks to finance a large portion of A $44 billion deal and they could face a big loss.
As in any large acquisition, banks will try to sell the debt to get it off their books. But investors have lost appetite for risky debt such as leveraged loans, spooked by rapidly rising interest rates around the world, fears of a recession and market volatility fueled by Russia’s invasion of Ukraine.
While Musk will provide a whopping $44 billion by selling his stake in electric vehicle maker Tesla and by leaning on equity financing from large 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 recent high-profile losses for banks in leveraged financing, more than 10 bankers and industry analysts told Reuters that the outlook was bleak for banks trying to sell the 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 a bank’s perspective, this is less than ideal,” said Wedbush Securities analyst Dan Ives. “Banks have their backs against the wall – they have no choice but to finance the deal.”
Sources of leveraged finance also previously told Reuters that potential losses for Wall Street banks involved in Twitter’s debt in such a market could reach hundreds of millions of dollars.
Societe Generale did not respond to requests for comment while 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 was forced to scrap efforts to sell $3.9 billion in debt financing Apollo Global Management’s deal to buy telecommunications and broadband assets from Lumen Technologies.
That comes after a group of banks had to take a $700 million loss on the sale of about $4.55 billion in debt that backed a leveraged buyout of business software company Citrix Systems.
“Banks are looking for Twitter — they had a big loss in 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.
Banks have been forced to pull back from leveraged financing in the wake of Citrix and other deals weighing on their balance sheets and that’s unlikely to change anytime soon.
The second quarter also saw US banks begin to suffer from their leveraged loan exposure as prospects for doing deals turned sour. Banks will begin reporting third-quarter earnings next week.