December 9, 2023

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Elon Musk’s U-turn on buying Twitter couldn’t have come at a worse time for banks to fund a bigger chunk. $44 billion deal and they could face significant losses.

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As with any major acquisition, banks will try to sell off the debt to remove it from their books. But investors have lost their appetite for riskier debt such as leveraged loans, fearing market volatility spurred by rapid interest rate hikes around the world, fears of a recession and Russia’s invasion of Ukraine.

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While Musk will provide more than $44 billion by selling his stake in electric vehicle maker Tesla and leaning on equity financing from large investors, major banks have committed to providing $12.5 billion.

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These 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.

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

The Twitter loan package includes $6.5 billion in leveraged loans, $3 billion in secured bonds and $3 billion in unsecured bonds.

“From a banks perspective, this is less than ideal,” said Dan Ives, analyst at Wedbush Securities. “Banks have their backs to the wall – they have no choice but to finance the deal.”

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Leveraged financing sources have previously told Reuters that potential losses for Wall Street banks involved in Twitter lending in such a market could run into the hundreds of millions of dollars.

Societe Generale did not respond to a request 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 had to scrap an effort to sell a $3.9 billion loan that financed Apollo Global Management’s deal to buy telecom and broadband assets from Lumen Technologies.

It came on the heels of a group of banks that lost $700 million on sales of about $4.55 billion in support of a leveraged buyout of business software company Citrix Systems.

“Banks are on the hook for Twitter – they took a big loss on the Citrix deal a few weeks ago and they are facing an even bigger headache from this deal,” said Chris Pultz, portfolio manager for Merger Arbitrage at Kellner Capital.

Citrix and other deals have forced banks to withdraw from leveraged financing and their balance sheets are unlikely to change any time soon.

In the second quarter also US banks began to take a hit on the risks of their leveraged loans as the outlook for dealmaking turned sour. Banks will start reporting third quarter earnings next week.