Banks committed to helping finance Elon Musk’s takeover of Twitter Inc plan to hold $13 billion in debt to support the deal, rather than sell all of it, according to people familiar with the matter. corporate financing.
The Wall Street Journal previously reported that banks would face losses of around $500 million or more if they tried to sell Twitter’s debt at current market prices. If all the banks hold the debt, they can mark it on their books at a higher price based on the fact that prices will eventually rise again.
Twitter may have had the dubious distinction of being the biggest fictional deal of all time, overtaking a product from banks in the global financial crisis, when they were stuck with nearly $300 billion in debt that they struggled to sell to investors.
Twitter’s move threatens to bring the faltering leveraged-buyout pipeline to a standstill, tying up capital that Wall Street can use to support new deals.
Twitter’s $44 billion takeover is backed by banks including Morgan Stanley and Bank of America Corp.
and Barclays PLC signed agreements in April to provide the debt financing Mr. Musk needed to buy the company. They originally intended to find third-party investors, such as credit asset managers and mutual funds, who would lend the money as is customary in leveraged buyouts.
But rising interest rates and growing recession worries have cooled investors’ appetite for risky loans and bonds. Mr. Musk’s past criticism of Twitter for misrepresenting the state of its business and the number of fake accounts on the platform doesn’t help either — nor does Twitter’s performance deteriorate, the people added.
Banks also face a timing problem: Mr. Musk and Twitter have until Oct. 28 to close on their planned acquisition, and there’s still no guarantee that the unlikely billionaire will follow through or that another problem won’t arise. (If a deal doesn’t close by then, both sides will go to court in November.) That means banks won’t have enough time to sell the debt to third-party investors, a process that usually takes weeks. even if they want to sell now.
Some people say banks hope to be able to sell some of Twitter’s debt by early next year if market conditions improve, assuming the deal closes. Twitter is discussing splitting the debt into different tranches that could be easier for banks, hedge fund investors or direct lenders, one of the people said.
Banks have good reasons for wanting to keep debt as short as possible.
Holding loans and bonds can force them to set aside more capital to meet regulatory requirements, which limits what banks can lend to others. Banks also face year-end stress tests, and regulators will want to limit their exposure to risky corporate debt before assessing the reliability of their balance sheets.
So far this year, banks have already taken hundreds of millions of dollars in losses and have been forced to hold increasing amounts of debt.
Twitter’s debt, including $6.5 billion in term loans and $6 billion in bonds, will be added to a growing pile of syndicated banks recently valued at about $45 billion by Goldman Sachs.
Banks’ third-quarter earnings showed a sharp decline in deal-related income. Goldman’s debt underwriting revenue fell to $328 million in the third quarter from $726 million a year earlier.
Morgan Stanley CEO James Gorman recently said his bank was “very cautious in the leveraged-finance arena” for new deals, while Bank of America’s Brian Moynihan said there was “a natural decline” in the leveraged loan market and the bank. was working to go through the pipeline of existing deals.
Private equity firms that rely heavily on debt to finance their acquisitions are increasingly turning to private equity lenders such as Blackstone Credit and Blue Owl Capital. Inc.
These firms do not have to split up and sell debt and can provide financing from investment vehicles created for this purpose. Although more expensive and difficult to obtain than earlier this year, the main source of acquisition financing recently has been private credit providers.
Banks are getting more and more creative to deal with their already committed debts.
In the takeover of Citrix Systems Inc., the banks agreed to convert about $6 billion of syndicated term loans into more traditional bank loans they chose to keep on their balance sheets, but they sold about $8 billion in bonds and loans. A loss of more than 500 million dollars, the Journal reports. In Nielsen Holdings PLC’s financing structure, private equity lender Ares Capital took $3 billion in senior unsecured bonds, turning into a junior secured loan. Corp.
agreed to lead. Banks held the remainder of Nielsen’s approximately $9 billion in debt on their balance sheets.
– Matt Wirz contributed to this article.
write to Laura Cooper at firstname.lastname@example.org and Alexander Saeedy at email@example.com
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8