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Banks choking on debt face losses as Musk proceeds with Twitter deal

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Oct 4, 2022

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Elon Musk's bankers are in a bind. Seven investment banks, including Morgan Stanley and Bank of America, now must offload $12.5 billion of debt financing in a market where few buyers exist.

Why it matters: Bank losses on just the unsecured portion of the Twitter debt financing could reach hundreds of millions of dollars.

By the numbers: The financing for the $44 billion deal (disclosed in April) includes a $6.5 billion leveraged loan, $3 billion of secured bonds, and another $3 billion of unsecured bonds — the riskiest tranche.

Details: Morgan Stanley, Bank of America, Barclays, MUFG, BNP Paribas, Mizuho, and SocGen are the banks providing the Twitter debt financing.

  • Bloomberg reported in June that the banks had promised the cost of the unsecured, CCC-rated debt would not exceed 11.75%.
  • The banks expected to finance the tranche at around 9%, according to one source familiar with the matter.
  • But debt markets have since plunged, spiking bond yields and forcing debt buyers to scatter. Yields on CCC-rated bonds have surged to more than 15%, meaning the banks face steep losses on the tranche.
  • "If the debt yields more than 11.75%, banks eat into fees. They would incur outright losses if the rate exceeds 12.125%," Bloomberg wrote.

Zoom in: Banks are holding the debt at the moment, so putting an exact figure on potential losses and gains is difficult. The banks can offset losses through fees earned in other parts of the transaction.

  • But facing a brutal market for now, lenders can only hope for yields to drop and buyers to emerge. If recent deals are any indication, that's not going to happen anytime soon.
  • "I still believe there's demand out there. But if it's CCC, that's just not what people want to jump into right now," said Eric Rosenthal, senior director of leveraged finance at Fitch Ratings.
  • For banks to offload that kind of debt in the current market, "issuers are going to have to pay up," he said.
  • The banks either declined to comment or did not immediately respond to a request for comment. Twitter declined to comment.
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