What do banks calculate when lending money to Elon Musk to buy Twitter and what will happen if this billionaire declares bankruptcy?

According to The Atlantic, billionaire Elon Musk did not have much trouble getting a loan from the bank for the $44 billion deal to buy Twitter. The leading bank Morgan Stanley along with a series of other financial institutions such as Bank of America, Barclays … agreed to lend the Tesla founder up to $ 13 billion in less than a week of approval.

Even when Elon Musk hesitated because the price was too high, leading to unnecessary lawsuits, the billionaire finally completed the deal in October 2022. Of course, banks still lend to Elon Musk, adding to the overall debt that Twitter has to pay.

Typically, banks will clear this high-risk loan quickly to institutional investors or hedge funds, which are in higher demand for this type of credit. But as soon as he came to power, Elon Musk skipped the “honeymoon” period to fire half of Twitter’s former employees, restore a series of banned accounts as well as tighten the work culture. This disturbance has caused many businesses to suspend advertising on Twitter, causing the social network to lose revenue.

Bloomberg reported that this volatility caused many investors to lose interest in Elon Musk’s loan. When banks probed market demand for these loans, the rates they received were as little as 60 cents for every $1 of value, one of the lowest in 10 years in the market.

So the creditors only have to keep this credit of Elon Musk and expect the gamble on Twitter to succeed.

The question is why are banks lending to Elon Musk in this risky and uncertain deal?

Financial mindset

According to The Atlantic, although Elon Musk’s plan to buy Twitter is not really economically sound, the investment environment at the time of April 2022 was very different from today. The federal funds rate at that time remained low, below 1%. Yields on high-risk corporate bonds (High Yield) are also lower than they are today.

 

The Federal Funds Rate is the rate at which commercial banks lend to each other for a period of one day (overnight loans) to obtain an amount equal to their reserve requirement. US Federal Reserve (FED).

 

Tech stocks at the time hadn’t sold off yet, and a loan backed by Twitter with an average return of 6.5% looked quite reasonable to banks, especially when they can sell the loan back as soon as the deal closes.

The second reason why banks approve loans quickly is fees. According to Refinitiv’s estimates, the lenders in this deal will collect a loan fee of about 150-200 million USD, especially Morgan Stanley as they play a key role in Elon Musk’s loan.

Another reason it’s so important is that banks are not just investing in Twitter, but in Elon Musk himself. Tesla founder is the richest billionaire in the world with a series of famous technology companies under his command in April 2022. This is the loan partner that any bank wants to work with.

In addition, banks are also quite interested in other companies under Elon Musk such as SpaceX or Tesla besides Twitter. Especially SpaceX, although these are private companies, if they are issued shares for an initial public offering (IPO), the value of the company will increase many times, similar to Tesla.

Bankrupt

According to an analysis by financial credit consulting firm 9Fin, creditors have lost about half a billion dollars in market value with Elon Musk’s loan, but for banks, they still have backup plans to limit damage to a minimum.

The Atlantic, although not able to sell the loan, but banks can still benefit from interest rates. Elon Musk’s loan has a floating rate loan, so Twitter will have to pay more interest if the US Federal Reserve (FED) continues to raise interest rates. So banks can collect $1 billion in annual interest from Twitter if they keep Elon Musk’s loan.

Of course, The Atlantic believes that everything will fall apart if Elon Musk declares bankruptcy with Twitter.

But the likelihood of this happening is quite small when the Tesla founder poured more than $ 30 billion of electric car company stock into the Twitter deal, in addition to a $ 13 billion bank loan. If Twitter defaults, Elon Musk will lose all the money from selling the above shares.

Therefore, the worst case scenario is when Twitter cannot pay, Elon Musk will use his own money to make up for it, or use Tesla stock to buy back bank debt.

The Atlantic reported that Twitter’s financial situation is not in fact the biggest concern of banks today. The biggest challenge now is whether Elon Musk will continue to be patient with Twitter. If the Tesla founder gave up hope of improving Twitter and left the mess to the bank, it would be a disaster for creditors.

Even if he loses Twitter, Elon Musk still has the golden egg laying Tesla, then SpaceX and many other potential companies. However, with the nature of not giving up and working hard, this founder will not easily admit defeat or lose his reputation with Twitter.

The Atlantic, obviously pouring a mountain of loan money into the business of the richest person in the world also has its downside, that is, banks will have to fear the billionaire borrower changes his mood with the project. his new.

*Source: The Atlantic