Banks financing Musk’s Twitter deal face hefty losses

Oct 5 (Reuters) – Elon Musk’s U-turn on shopping for Twitter Inc (TWTR.N) couldn’t have come at a worse time for the banks funding a big portion of the $44 billion deal and so they could possibly be going through vital losses.

As in any massive acquisition, banks would look to promote the debt to get it off their books. However traders have misplaced their urge for food for riskier debt reminiscent of leveraged loans, spooked by speedy rate of interest hikes around the globe, fears of recession and market volatility pushed by Russia’s invasion of Ukraine.

Whereas Musk will present a lot of $44 billion by promoting down his stake in electrical automobile maker Tesla Inc (TSLA.O) and by leaning on fairness financing from massive traders, main banks have dedicated to supply $12.5 billion.

They embody Morgan Stanley , Financial institution of America Corp and Barclays Plc (BARC.L).

Mitsubishi UFJ Monetary Group Inc (8306.T), BNP Paribas SA (BNPP.PA), Mizuho Monetary Group Inc (8411.T) and Societe Generale SA are additionally a part of the syndicate.

Noting different current high-profile losses for banks in leveraged financing, greater than 10 bankers and trade analysts instructed Reuters the outlook was poor for the banks making an attempt to promote the debt.

The Twitter debt bundle is comprised of $6.5 billion in leveraged loans, $3 billion in secured bonds, and one other $3 billion in unsecured bonds.

“From the banks’ perspective, that is lower than excellent,” stated Wedbush Securities analyst Dan Ives. “The banks have their backs to the wall – they don’t have any selection however to finance the deal.”

Leveraged financing sources have additionally beforehand instructed Reuters that potential losses for Wall Avenue banks concerned within the Twitter debt in such a market might run to tons of of thousands and thousands of {dollars}.

Societe Generale didn’t reply to a request for remark whereas the opposite banks declined to remark. Twitter additionally declined to remark. Musk didn’t instantly reply to a request for remark.

Simply final week, a bunch of lenders needed to cancel efforts to promote $3.9 billion of debt that financed Apollo World Administration Inc’s (APO.N) deal to purchase telecom and broadband property from Lumen Applied sciences Inc .

That got here on the heels of a bunch of banks having to take a $700 million loss on the sale of about $4.55 billion in debt backing the leveraged buyout of enterprise software program firm Citrix Programs Inc.

“The banks are on the hook for Twitter — they took an enormous loss on the Citrix deal a couple of weeks in the past and so they’re going through an excellent greater headache with this deal,” stated Chris Pultz, portfolio supervisor for merger arbitrage at Kellner Capital.

Banks have been pressured to tug again from leveraged financing within the wake of Citrix and different offers weighing on their stability sheet and that’s unlikely to vary anytime quickly.

The second quarter additionally noticed U.S. banks begin to take successful on their leveraged loans’ publicity because the outlook for dealmaking turned bitter. Banks will start reporting third-quarter earnings subsequent week.

Reporting by Anirban Sen, extra reporting by Megan Davies, Lananh Nguyen, Sheila Dang and Hyunjoo Jin; Writing by Paritosh Bansal; Modifying by Edwina Gibbs

Our Requirements: The Thomson Reuters Belief Rules.