Sina Technology News Beijing time on May 27 morning news, according to reports, after Elon Musk (Elon Musk) acquired Twitter of the deal, Morgan Stanley The leading banks agreed to provide Musk with $13 billion in debt financing. However, if they are forced to package this debt to investors amid the current risk-off sentiment in the market, they could suffer losses.
According to people familiar with the matter, in the agreement reached between the lender and Musk, the maximum interest rate of the basic part of the $3 billion unsecured loan is 11.75%, and this part of the debt may be packaged into a “CCC” rated junk bond. However, the average yield on similarly rated junk bonds surged above 12% last week as investors were pulling out of riskier assets amid fears of high inflation, a possible recession and the fallout from the Russian-Ukrainian conflict.
Selling bonds at yields higher than 11.75% could result in banks not earning underwriting fees for the deal, the source said, while if yields had to rise above 12.125%, the bank would be in a direct loss.
Morgan Stanley and other members of the group of underwriters, including Bank of America , Barclays Bank, Mitsubishi UFJ Financial Group, BNP Paribas , Mizuho Financial Group and Societe Generale Banks declined to comment on the claims. Musk’s family office and Twitter have yet to respond.
For now, banks are not under pressure to package and sell these debt financings, and market conditions are likely to improve in the coming months. Even if part of the deal loses money, the overall financing package is not necessarily unprofitable for lenders. The bigger uncertainty, though, is that Musk has repeatedly expressed doubts about whether the deal will be finalized, even though the two sides have reached an agreement to close the deal this year.
In financing packages for a handful of M&A deals, such as Musk’s acquisition of Twitter, large buffers were built within banks and interest rate caps were guaranteed to borrowers. Among them, unsecured debt tops out at double-digit rates. Earlier reports suggested that bank financing options for other deals, such as the Citrix takeover, could lead to bigger losses when markets were better earlier this year.
The banks that agreed to provide Musk with debt financing are also seeing some positive news that more of the overall financing package will come from equity rather than debt. Musk gave up his Tesla holdings, according to regulatory filings on Wednesday The stock-backed loan plan raises the equity portion of the deal directly to $33.5 billion.
Yields on “CCC” rated junk bonds surged to nearly 12.4% on Monday, the highest level since July 2020, according to data compiled by Bloomberg. However, that rate fell back to 11.95% by Wednesday. “CCC” is the lowest rating for junk bonds. At the same time, investor appetite for new bond issuance has waned, forcing borrowers to focus more on private credit markets for debt financing.
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