The $13 billion loan that American billionaire Elon Musk took out to buy Twitter (now X) in October 2022 has become one of the most problematic for banks since the financial crisis of 2008-2009.
The Wall Street Journal writes about it, citing unnamed sources involved in the deal.
Musk was loaned money to buy Twitter by seven banks – Morgan Stanley, Bank of America, Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho and Société Générale.
Banks that provide loans for acquisitions usually sell the debt to other investors to get it off their balance sheets and earn commissions. However, due to X’s weak financial performance, they were unable to do so this time, so the loan “hung” on their balance sheets.
The overdue loan undermined the banks’ ratings, which negatively affects their remuneration. In addition, due to the fulfillment of long-term loan agreements, in particular for X, some Barclays investment bankers had their annual salaries cut by at least 40% last year. Almost 50 of Barclays’ more than 200 managing directors left the firm.
In addition, keeping high-risk loans directly on the balance sheet is drawing more attention to banks from regulators.
The loan to buy Twitter has been hanging around longer than any similar unsold deal since the financial crisis of 2008-2009. At that time, there were many more suspended deals, but banks were still able to sell or write off most of the stalled debt within a year of issuing the loans. In 2007, a $20 billion loan was never repaid to the banks, as the borrower went bankrupt about a year later.
Steven Kaplan, a finance professor at the University of Chicago who has studied similar cases since the 1980s, said the Twitter loan is one of the biggest stalled deals of all time, not just since the 2008 financial crisis.
“The loans have been weighing on banks for much longer than other stalled deals we’ve seen,” he said.
X’s market valuation has fallen to about $19 billion, well below its $44 billion purchase price. This further complicates the situation for creditors. However, the banks receive interest payments and do not lose hope that X will eventually repay all the debt. Musk said that annual interest payments amount to about $1.5 billion.
The banks that agreed to make the deal, which even Musk said was overpriced, did so primarily because servicing the world’s richest man was too attractive a prospect to pass up. The financial institutions are looking forward to future deals with his other companies, including SpaceX, Tesla, and Neuralink. In addition, Musk and other investors have invested about $30 billion to buy the social network, providing banks with a certain cushion in case something goes wrong.
Earlier this year, the banks discussed a possible restructuring plan under which Musk could repay part of X’s debt and the banks would agree to reduce interest payments. X did not fulfill the plan.
Author:
Oleksandra Amru