In the morning of May 27, Beijing time, it was reported that in the transaction plan of Elon Musk's acquisition of twitter, several banks led by Morgan Stanley agreed to provide $13billion in debt financing to musk However, if they are forced to package the debt and sell it to investors in the current risk aversion of the market, they may suffer losses
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According to people familiar with the matter, in the agreement reached between the loan institutions and musk, the maximum interest rate of the $3billion unsecured loan for the basic part is 11.75%, which may be packaged into a "CCC" rated junk bond. However, due to concerns about high inflation, possible recession and the impact of the conflict between Russia and Ukraine, investors are withdrawing from high-risk assets, and the average yield of similarly rated junk bonds soared to more than 12% last week.
The source said that selling bonds at a yield higher than 11.75% may cause banks to fail to earn the underwriting fee of the transaction, and if the yield has to be increased to more than 12.125%, banks will directly suffer a loss.
Morgan Stanley and other members of the underwriter group, including Bank of America, Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho Financial Group and Societe Generale, declined to comment on this statement. Musk's family office and twitter have yet to respond.
At present, banks are not under pressure to package and sell these debt financing, and market conditions may improve in the coming months. Even if part of the transaction suffers losses, the overall financing scheme is not necessarily unprofitable for lending institutions. However, the greater uncertainty at present is that although the two sides have reached an agreement to complete the transaction this year, musk has repeatedly expressed doubts about the final completion of the transaction.
In the financing scheme of Musk's acquisition of Twitter and a few other M & A transactions, the bank has established a large buffer internally and guaranteed the interest rate ceiling to the borrower. Among them, the maximum interest rate of unsecured debt reaches double digits. It was previously reported that when the market conditions were good earlier this year, the financing schemes provided by banks for Citrix acquisition and other transactions may lead to greater losses.
Banks that agreed to provide debt financing for musk are also seeing some good news, that is, more part of the overall financing plan will come from equity rather than debt. According to the documents submitted to regulators on Wednesday, musk abandoned the plan to guarantee loans with Tesla shares and directly increased the equity part of the transaction to $33.5 billion.
Bloomberg statistics show that on Monday, the yield of "CCC" rated junk bonds soared to nearly 12.4%, the highest level since July 2020. However, the interest rate fell back to 11.95% on Wednesday. "CCC" is the lowest rating of junk bonds. At the same time, investors' interest in new bond issuance has weakened, forcing borrowers to pay more attention to the non-public credit market for debt financing.