It took just days for banks across Wall Street to cobble together a $25.5bn financing package for Elon Musk’s bid for Twitter, an exercise that would normally take weeks. The speed stumped Twitter’s advisers: how could banks’ buttoned-up risk management committees get comfortable with the deal so quickly?

As one person involved in the debt financing explained, the due diligence “was easy. There was none. Not in the classic sense.”

The $44bn Twitter buyout shows how the Wall Street machine has grown more comfortable with debt and its associated risks, particularly when the person in need of cash is one of the wealthiest in the world. It also raises questions about how far lenders are willing to go to win business — and lucrative fees — and what might happen if they misjudge the risks.

At the centre of the debate is the value of Tesla, the electric automaker worth $913bn that Musk leads. Musk’s stake in the company is worth more than $150bn, and part of those holdings were used to secure a margin loan that makes up just under half of the $25.5bn of debt the banks have put forward.

That wealth eased concerns for many lenders, which accelerated due diligence processes at the behest of Morgan Stanley, Musk’s financial adviser and one of the biggest lenders on the deal. One lender told the Financial Times that for them, it was “not tough to get our arms around” the margin loan.

Lenders are still staring down one red flag, though — it is not clear how Musk plans to raise the remaining cash needed for the deal, which could reach up to $21bn. There is also uncertainty swirling around the value of Tesla shares should its largest owner significantly cash out.

Line chart of Tesla's equity valuation ($bn) showing Tesla stock is down nearly a fifth since Musk disclosed Twitter stake

Underwriters’ nerves are already being tested. Tesla’s stock registered its biggest daily loss since September 2020 this week after the ink dried on the takeover, knocking $126bn from the company’s valuation.

The share price will be closely watched by Musk’s lenders since it is their collateral should he default on his loan. Bankers said that security gave them confidence that Musk and Twitter would be good for the debt, given the billionaire is unlikely to want to part with millions of Tesla shares.

“What could go wrong?” asked a third person involved in putting together the debt portion of the deal. “He’s literally the richest man in the world. The loan is a small portion of his overall wealth.” A banker close to Musk added: “There is $30bn of equity plus or minus underneath us. We are going to get our money back.”

Musk could sell between 15 and 20 per cent of his Tesla shares, but that simple move would likely lead to additional selling by the chief executive to cover $3bn to $4bn in capital gains taxes, according to an FT analysis.

Lenders need not look far for one example of how quickly things can sour when lending based on a volatile stock. Several of the banks on Musk’s margin loan were caught up in the separate implosion of Archegos last year, racing to sell stocks while the family office was collapsing. The declines fed on themselves as lenders dumped shares on the open market.

It is unclear how receptive the market would be if Musk defaulted and the dozen banks providing him the $12.5bn margin loan had to sell Tesla stock all at once.

Questions remain over how Musk will fund the $21bn equity cheque

Musk, in a letter to Twitter chair Bret Taylor, has said he is exploring how to allow some existing shareholders to invest in the company once it is private. He has also held talks with private equity group Thoma Bravo about teaming up on the deal, which would reduce the amount of the cheque he ultimately has to write and lower the number of Tesla shares potentially up for sale, according to people briefed on the matter.

The rapid turnround by the banks underscores how significantly capital markets have evolved over the past decade, as private equity groups have moved deeper into credit and the appetite for lowly rated but higher-yielding debt has grown.

Even without long due diligence calls — or the non-public information typically available to banks in leveraged buyouts — they recognise the risks of holding on to the traditional debt themselves. The banks underwriting the $13bn of loans, including Bank of America, Barclays, BNP Paribas, MUFG and Mizuho, are expected to move quickly once the deal is finalised to offload the debt from their balance sheets to credit investors such as Apollo Global Management.

That debt will consume much of Twitter’s cash flow in the coming years, according to analysts, meaning Musk could be forced to pay interest on his margin loans, cover any shortfalls on the margin loan if Tesla stock were to fall sharply, and pump cash into Twitter for interest payments.

“Is someone like Musk, who has a net worth of $275bn, going to let a $30bn equity valuation for him go for $12bn of debt in a default?” one lender asked. “He would just pay the debt down. It’s how a lot of banks got comfortable [with the deal].”

Regardless, Musk will pile Twitter — and himself — with debt just as the Federal Reserve raises interest rates from rock-bottom levels. Analysts with credit rating agency S&P Global warned this week that they expected to downgrade the company deep into junk territory if the takeover is consummated.

“Elon Musk’s proposed takeover of Twitter would cause leverage to spike significantly,” Scott Zari, an analyst at S&P, said. That “increases risks and uncertainty around potential changes in strategy, management, and governance”, he added.



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