Analysis: Musk’s banks may have a way to cut Twitter deal losses

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Oct 11 (Reuters) – Elon Musk’s banks, facing huge losses on their pledge to fund the $44 billion takeover of Twitter Inc (TWTR.N), may not be able to hold their own. easily get out of the deal, but they might have a way to minimize the hit they’re taking.

Morgan Stanley (MS.N), Bank of America Corp (BAC.N), Barclays Plc (BARC.L) and Mitsubishi UFJ Financial Group Inc (8306.T) led a $13 billion financing for the offering of Musk, the richest in the world. man and CEO of Tesla Inc (TSLA.O) and SpaceX.

Typically, banks would sell the debt to investors and pocket an underwriting fee. But the terms of the funding were set in April when Musk first made an offer for Twitter and the market for that debt has since crashed. This means that if the banks tried to sell the debt now, they would have to do so at a loss to entice investors to get rid of it.

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Banks could, however, try to minimize their losses by increasing the amount of debt backed by collateral so that it is less risky, keeping more of it on their balance sheets and reducing the amount they have to sell to investors. in the near term, according to half a dozen bankers and debt capital market investors.

Two people familiar with banking syndicate thinking pointed to Wall Street’s experience with the funding provided to finance the takeover of enterprise software company Citrix Systems Inc (CTXS.MX) as a possible model.

In this case, Wall Street firms ended up taking a loss of about $700 million after selling $8.55 billion in loans and bonds, but avoided an even bigger loss by changing the package. , said market sources and investors.

But they would need Musk’s approval for any changes to the funding structure, and there’s no guarantee he would agree, they said. Reuters could not determine whether the banks had approached Musk with a proposal.

Morgan Stanley, Barclays, MUFG, Bank of America, Societe Generale (SOGN.PA), Mizuho and BNP Paribas (BNPP.PA) declined to comment. Representatives for Musk and Twitter did not respond to requests for comment.

Elon Musk against Twitter

The debate, currently a topic of conversation among investment bankers and debt investors, offers a window into the havoc wrought on Wall Street by Musk’s U-turn last week.

After engaging in a week-long court battle to try to get out, Musk abruptly decided to go through with his deal on the original terms.

Musk, however, conditioned his proposal on his ability to secure debt financing and now has until October 28 to close the deal. Read more

Roberta Goss, head of the bank loan and secured loan bond platform for investment manager Pretium Partners, said any funding “is going to be a tough sell” to investors because the amount of debt taken on is nearly seven times Twitter’s expected 2022 earnings of $2 billion, making it very risky.

Musk would have the upper hand in any discussion with the banks.

“He’s out of the banks’ money and into Musk’s money right now,” Goss said.

VARIOUS OPTIONS

Debt financing includes leveraged loans, which are risky due to the amount of debt the business has taken on, as well as secured and unsecured bonds.

Any sale of debt to a large pool of investors would require credit ratings from the three major rating agencies, Moody’s Investors Services, S&P and Fitch. Moody’s senior analyst Neil Begley said banks have yet to approach his company for such ratings.

“If the banking group is looking for a deal to syndicate, they often look for credit ratings as this acts as a passport to the debt capital markets, but we haven’t heard of them yet,” said Begley.

Usually, such ratings are sought two to three weeks before a debt sale to give agencies time, but Begley said a shorter timeframe was possible given his company gave Twitter a Ba2 rating during its last bond issue in February.

Begley said the fact that banks have not contacted them so far could also be a sign that they were considering holding onto debt until markets improve.

“If debt covenants are really hard-wired here, banks may have to consider delaying debt syndication plans if the market doesn’t have an appetite for high-leverage deals, so that wouldn’t have no sense in coming to see us urgently,” he said. .

PACKAGE ADJUSTMENT

Banks could hold more debt on their books by converting some unsecured debt to second lien or pledged loans, and seek to sell more Term A (TLA) loans, several bankers said. and high yield investors said.

TLA is considered a relatively safer category of debt held by the lenders themselves.

In September, the banks financing the Citrix takeover undertook a similar restructuring. They avoided bigger losses by adding a TLA component to the package, according to one of the sources familiar with the Citrix deal.

The banks also sold a smaller portion of Term B loans, a riskier debt category, to institutional investors, and converted nearly $4 billion of the package into a second lien loan that was held on their books. as they waited for more favorable market conditions. , the source said.

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Reporting by Shankar Ramakrishnan in New York and Krystal Hu in San Francisco; Additional reporting by Chibuike Oguh, Abigail Summerville and Matt Tracy; Editing by Anirban Sen, Paritosh Bansal and Chris Reese

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