Elon Musk's banks may not be able to easily walk out of the transaction since they are facing enormous losses on their promise to finance the $44 billion acquisition of Twitter Inc (TWTR.N), but they may be able to find a method to lessen the blow.
The offer by Musk, the richest man in the world and the CEO of Tesla Inc. (TSLA.O) and SpaceX, received a $13 billion financing from Morgan Stanley (MS.N), Bank of America Corp. (BAC.N), Barclays Plc (BARC.L), Mitsubishi UFJ Financial Group Inc (8306.T), and others.
Banks would typically sell the debt to investors and keep the underwriting charge. However, the market for this type of debt has plummeted since the terms of the financing were negotiated in April when Musk originally made an offer for Twitter. Therefore, if banks were to sell the debt right now, they would have to do it at a loss in order to persuade investors to accept it.
However, according to a half-dozen debt capital market bankers and investors, banks could try to limit their losses by increasing the amount of debt that is secured by collateral to make it less risky, holding a larger portion of it on their balance sheets, and lowering the amount they have to sell to investors in the near term.
Two people who are acquainted with the banking syndicate's thinking suggested using Wall Street's experience in providing funding to fund the takeover of business software company Citrix Systems Inc (CTXS.MX) as a viable example.
However, they noted that any modification to the finance structure would require Musk's approval, and there is no assurance that he would do so. Whether banks had approached Musk with a proposal was unknown to Reuters.
The following companies declined to comment: Morgan Stanley, Barclays, MUFG, Bank of America, Societe Generale (SOGN.PA), Mizuho, and BNP Paribas (BNPP.PA). Requests for comment from Musk and Twitter's representatives went unanswered.
The argument, which is currently being discussed by debt investors and investment bankers, gives insight into the mayhem Musk's U-turn last week caused on Wall Street.
Musk chose to close on his contract under the original conditions after fighting to get out of it in court for several weeks.
Musk, however, made a condition in his proposal that he be able to obtain debt financing, and he now has until October 28 to complete the deal.
Any financing is "going to be a hard sell" to investors, according to Roberta Goss, head of the bank loan and collateralized loan obligations platform for investment manager Pretium Partners, because the amount of debt being taken on is nearly seven times Twitter's projected $2 billion in profits for 2022, making it very risky.
Musk would be in a stronger position in any negotiations with the banks.
For banks, it is now not profitable, but for Musk, it is profitable.
VARIOUS OPTIONS
Leveraged loans, which are dangerous due to the amount of debt the company is taking on, as well as secured and unsecured bonds make up the debt financing package.
Credit ratings from the major three rating agencies, Moody's Investors Services, S&P, and Fitch, would be required for any debt offering to a large investor pool. Banks have not yet contacted Moody's Senior Analyst Neil Begley's company for such ratings, he said.
We have not heard from the bank group as of yet, according to Begley. "If the bank group are searching for a deal to syndicate, they generally pursue credit ratings since it works as a passport to the debt capital markets," she said.
In order to allow the rating agencies time, such ratings are typically requested two to three weeks before to a debt sale, but Begley said a quicker turnaround was achievable given that his firm awarded Twitter a Ba2 rating when it previously issued bonds in February.
Begley suggested that the banks' lack of communication with them thus far may also be an indication that they are considering holding onto the loan until the markets stabilize.
It wouldn't make sense to visit us urgently, he added, "if the debt commitments are extremely hard-wired here, then banks may have to consider delaying loan syndication plans if the market has no taste for heavily levered transactions."
PACKAGE TWEAK
According to numerous high-yield bankers and investors, banks might carry additional debt on their books by turning some unsecured debt into second-lien loans, or loans secured by a pledge of collateral, and looking to sell a larger amount of Term Loan A's (TLA).
TLA is viewed as a class of debt owned by the lenders themselves that is thought to be comparatively safer.
Banks supporting the Citrix takeover underwent a similar adjustment in September. One of the persons acquainted with the Citrix transaction claimed that by included a TLA component in the package, they were able to avoid suffering further losses.
In addition, the banks transformed about $4 billion of the package into a second-lien loan and sold a lesser portion of Term Loan Bs, a riskier class of debt, to institutional investors as they awaited more favourable market circumstances, according to the source.
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