Banks Funding Musk’s Twitter Deal Face Heavy Losses

Elon Musk’s U-turn on buying Twitter couldn’t have come at a worse time for the banks funding much of the $44 billion and they could face significant losses.

As with any major acquisition, the banks would seek 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, recession fears and market volatility sparked by the Russian invasion. from Ukraine.

While Musk will provide much of the $44 billion by selling his stake in electric vehicle maker Tesla and relying on equity financing from big investors, the big banks have pledged to provide $12.5 billion. dollars.

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 other high-profile recent losses for banks in leveraged finance, more than 10 bankers and industry analysts told Reuters the outlook was poor for banks trying to sell debt.

The Twitter’s debt package includes $6.5 billion in leveraged loans, $3 billion in secured bonds, and an additional $3 billion in unsecured bonds.

“From a banking perspective, it’s less than ideal,” said Dan Ives, an analyst at Wedbush Securities. “The banks have their backs to the wall – they have no choice but to fund the deal.”

Leveraged finance sources have 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 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 reverse efforts to sell $3.9 billion in debt that funded Apollo Global Management’s deal to buy telecommunications and broadband assets from Lumen. Technologies.

This follows a group of banks facing a $700 million loss on the sale of around $4.55 billion in debt backing the leveraged buyout of enterprise software company Citrix Systems.

“Banks are on the hook for Twitter – they suffered a big loss on the Citrix deal a few weeks ago and they face an even bigger headache with this deal,” said Chris Pultz, manager of portfolio for merger arbitrage at Kellner Capital.

Banks have been forced out of leveraged finance in the wake of Citrix and other deals straining their balance sheets and that’s not expected to change any time soon.

The second quarter also saw US banks start to take a hit on their leveraged loan exposure as the trading outlook soured. Banks will start reporting their third quarter results next week.