What were Elon Musk’s lenders thinking?

When Elon Musk sought funding for his bid to take over Twitter earlier this year, he had little trouble finding institutions willing to give him the money he needed. Morgan Stanley took the lead and organized a syndicate of banks, including Bank of America and Barclays, which pledged to lend Musk $13 billion. The whole thing took less than a week. Although Musk tried to back out of his deal to buy Twitter, in late October he managed to do so and the banks gave him the money, which is now debt on Twitter’s balance sheet.

Typically, banks will quickly push these types of loans off their books by selling them to institutional investors and hedge funds with a higher appetite for risk. But in the month since Musk took over, he’s fired half of Twitter’s workforce, reinstated banned accounts (including Donald Trump’s), and tweeted maniacally, leading many of Twitter’s biggest advertisers to suspend ad spending on the site. So investors aren’t that interested in buying Twitter’s debt right now, according to Bloomberg NewsWhen banks tested the market for loans, they got offers as low as 60 cents. For now, then, banks will keep the loans on their books and hope Musk’s plans for the site work out.

All of which raises a simple question: What were the banks thinking?

Surprisingly, perhaps, there are real answers to this question. First, while Musk’s strategic plans for Twitter never made much economic sense, the business and investment climate in April was very different than it is today. The federal funds rate, which drives overnight lending between banks and helps ensure market liquidity, was still at a low level of less than 1%. Interest rates on high-yield corporate debt were significantly lower than they are today. Most tech companies had not yet seen their stock sell off. So a package of loans, most of them backed by Twitter resources, with an average interest rate of around 6.5%, might not have looked outrageously risky, and the banks might have reasonably thought they would be able to move loans off their books with relative ease.

Then, of course, there are the taxes. According to Refinitiv’s estimates, the banks that provided the financing for the deal were lined up to raise something in the region of $150 million to $200 million, while Morgan Stanley, who served as Musk’s top adviser on the deal, it raised millions more than that.

Ultimately, these loans were a gamble not just on Twitter, but on Musk himself. He’s the richest man in the world, or at least he was in April, and he’s generally someone banks want to do business with. More to the point, banks are very interested in other Musk companies, including Tesla but especially SpaceX, which is currently private but could organize a lucrative IPO in the future. It’s easy to imagine that helping Musk fund his Twitter spree could help those banks win a share of Musk’s future business.

That may not be much comfort to their senior executives at the moment, given that credit analyst firm 9fin estimates the banks have already incurred around half a billion dollars in mark-to-market losses on their loans. But the truth is, Musk’s backers could still emerge relatively unscathed. After all, while the financing terms Musk secured for the deal look pretty good by November’s standards, the loans he took out weren’t cheap. They were also floating rate loans, meaning that the interest rate Twitter has to pay will rise as overall interest rates rise, up to a maximum of 11.75% on riskier loans. So if banks end up having to keep loans on their books, they’ll collect up to $1 billion a year in interest payments.

That won’t matter, of course, if Musk ends up filing for bankruptcy. But even though she’s brought it up as a possibility, it’s not really clear if it would make sense for him to do so. Musk, along with his partners, has invested more than $30 billion in Twitter stock, as well as $13 billion in debt. If Twitter goes bust, he and his investors would likely lose all of that, along with control of the company. So the more plausible outcome (at least as long as Musk is still interested in Twitter) would be for him to continue paying the interest—out of his own pocket, if Twitter can’t—or simply buy back the debt.

What it suggests is that Twitter’s financial performance isn’t the most important thing banks need to worry about. The biggest risk is that Musk gets bored with his new toy and decides that running a town square is too much of a hassle. In that scenario, it’s easy to imagine him walking away, leaving the banks to figure out what to do with Twitter. But that’s the risk you run when you lend piles of money to fickle billionaires: Your profits depend on their ever-changing moods.


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