Oct 5 (Reuters) – Elon Musk’s U-turn to buy Twitter Inc ( TWTR.N ) could not have come at a worse time for the banks financing much of the $44 billion deal, and they could face significant losses.
As in any large acquisition, banks would look to sell the debt to get it off their books. But investors have lost appetite for riskier debt such as leveraged loans, spooked by rapidly rising interest rates around the world, fears of a recession and market volatility fueled by Russia’s invasion of Ukraine.
While Musk will provide much of the $44 billion by selling off his stake in electric car maker Tesla Inc ( TSLA.O ) and by relying on equity financing from large investors, major banks have committed to providing 12.5 billions of dollars.
They include Morgan Stanley, Bank of America Corp and Barclays Plc (BARC.L).
Mitsubishi UFJ Financial Group Inc ( 8306.T ), BNP Paribas SA ( BNPP.PA ), Mizuho Financial Group Inc ( 8411.T ) and Societe Generale SA are also part of the community.
Noting another high-profile loss of leveraged financing by banks recently, more than 10 bankers and analysts told Reuters the outlook was grim for the banks trying to sell the debt.
Twitter’s debt package consists of $6.5 billion in leveraged loans, $3 billion in secured bonds and another $3 billion in unsecured bonds.
“From the banks’ perspective, it’s less than ideal,” Wedbush Securities analyst Dan Ives said. “The banks have their backs against the wall – they have no choice but to finance the deal.”
Debt financing sources have also previously told Reuters that potential losses for Wall Street banks involved in Twitter debt in such a market could run into the hundreds of millions of dollars.
Societe Generale did not respond to a request for comment, while the other banks declined to comment. Twitter also declined to comment. Musk did not immediately respond to a request for comment.
Just last week, a group of lenders had to abandon efforts to sell $3.9 billion of debt financing Apollo Global Management Inc’s ( APO.N ) deal to buy Lumen Technologies Inc’s telecommunications and broadband assets.
That came after a group of banks had to take a $700 million loss on the sale of about $4.55 billion in debt backing a leveraged buyout of business software company Citrix Systems Inc.
“The banks are on the hook for Twitter — they took a big loss on the Citrix deal a few weeks ago and they’re facing even more headaches with this deal,” said Chris Pultz, portfolio manager of mergers and acquisitions at Kellner Capital.
Banks have been forced to pull back from leveraged financing in the wake of Citrix and other deals weighing on their balance sheets, and that’s unlikely to change anytime soon.
In the second quarter, US banks also began to take on the risk of their leveraged loans as the outlook for deal-making worsened. Banks will start reporting their third quarter results next week.
Reporting by Anirban Sen, additional reporting by Megan Davies, Lananh Nguyen, Sheila Dang and Hyunjoo Jin; Writing by Paritosh Bansal; Editing by Edwina Gibbs
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