Elon Musk’s revived Twitter deal could burden banks with big losses

Banks that have agreed to finance

Elon Musktakeover of

Twitter a company

TWTR -3.72%

They face the prospect of huge losses now that the billionaire has changed course and shown his readiness To follow the dealin the latest sign of troubles for debt markets which are crucial to fundraising acquisitions.

As is usual with leveraged buyouts, the banks planned to offload debt rather than keep it on their books, but Market down Since April means if they do so now they will be in trouble for losses that could run into the hundreds of millions, according to people familiar with the matter.

Banks are currently looking at losses estimated at $500 million if they try to offload all debt to third-party investors, according to 9fin, a leveraged finance analytics firm.

Mr. Musk’s representatives and Twitter were trying this out to split settlement terms That would enable the stalled deal to move forward, and wrestle with issues including whether to Provided that Mr. Musk obtains the necessary debt financing, as now requested. On Thursday, a judge halted an impending trial over the deal, effectively ending those talks and giving Mr. Musk until October 28 to close the deal.

The debt package includes $6.5 billion in term loans, a $500 million revolving line of credit, $3 billion in secured bonds and $3 billion in unsecured bonds, according to public disclosures. To pay for the deal, Mr. Musk also needs To reach nearly $34 billion in equity. To help with that, he Receive letters of commitment in May to secure more than $7 billion in funding from 19 investors including

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inspiration corp.

Co-founder and

Tesla a company

Then-Board Member Larry Ellison and Sequoia Capital Fund LP.

Twitter will go private if Elon Musk’s $44 billion takeover offer is approved. This step will allow Mask to make changes to the site. Dan Gallagher of the Wall Street Journal explains the changes Musk has proposed and the challenges he might face when activating them. Illustration: Jordan Crans

Twitter debt will be the latest to hit the market while high-yield credit is virtually unavailable to many borrowers, as corporate debt buyers demand better terms and competitive rates. Concerns about an economic slowdown.

This dealt a huge blow to a company that is an important source of revenue for Wall Street banks and has done so before incurred more than a billion dollars in collective losses this year.

The bulk of that came last month, when banks, including Bank of America,

Goldman Sachs Group a company

And the

Credit Suisse Group AG

They sold debts related to the mass acquisition of Citrix Systems Inc. worth $16.5 billion Lost over $500 million On the purchase, the magazine reported.

Banks were forced to buy about $6 billion of Citrix’s debt themselves after it became apparent that investor interest in the overall debt package had been weak.

“The latest Citrix deal indicates that the market will struggle to digest the billions of loans and bonds stipulated in Twitter’s original funding scheme,” said Stephen Hunter, CEO at 9fin.

People familiar with the debt financing package said on Twitter that banks had built “flexibility” into the deal, which could help them cut their losses. It enables them to raise interest rates on debt, which means that the company will be in a difficult position to raise interest costs, trying to attract more investors to buy it.

However, this flexibility is usually capped, and if investors are still not interested in debt at higher interest rates, banks may eventually have to sell at a discount and absorb losses, or opt to keep the loans on their books.

Elon Musk has offered to close his Twitter acquisition on the terms he originally agreed to.


picture:

Mike Blake/Reuters

Twitter’s leveraged loans and bonds represent part of the $46 billion in debt that is still waiting to be split up and sold by banks for buyout deals, according to Goldman data. Includes transaction-related debt Including the purchase of nearly $ 16 billion From

Nielsen Holdings

PLC, the acquisition of a $7 billion auto products company

TENICO

Acquisition of a media company for $8.6 billion

Tigna a company

Private equity firms rely on leveraged loans and high-yield bonds to help pay off their biggest deals. Banks generally distribute leveraged loans to institutional investors such as mutual funds and CLOs managers.

When banks can’t sell debt, it usually ends up costing it even if they choose not to sell at a loss. Owning loans and bonds can force them to add more regulatory capital to protect their balance sheets and limit the credit banks are willing to extend to others.

In past recessions, losses from leveraged financing led to layoffs, and banks took years to rebuild their high-return divisions. The volumes of leveraged loans and high-yield bonds declined after the 2008 financial crisis as banks were not willing to add more risk.

In fact, many of the major banks on Wall Street are expected to reduce the ranks of their leveraged funding groups in the coming months, according to people familiar with the matter.

However, experts say banks appear to be in a much better position to weather the economic downturn now, thanks to post-crisis regulations that require more capital on balance sheets and better liquidity.

“Overall, the level of risk within the banking system now is not the same as it was before the financial crisis,” said Greg Hertrich, head of American deposit strategy at Nomura.

Last year was a notable year for private equity deals, with $146 billion in loans issued for acquisitions — the most issued since 2007.

However, continued losses from deals like Citrix and possibly Twitter may continue to dampen bank lending for mergers and acquisitions, as well as for companies with lower credit ratings in general.

“There will be a period of risk aversion as the industry considers acceptable terms for new deals,” said Richard Ramsden, an analyst at Goldman who covers the banking industry. “Unless this is clarified, there won’t be a lot of new debt obligations.”

write to Alexander Saidy at [email protected], Laura Cooper at [email protected] and Ben Dummett at [email protected]

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