Musk’s Twitter Takeover: A Financial Headache for Banks

When Elon Musk bought Twitter (now X) for $44 billion in October 2022, it wasn’t just a big deal for the tech world. It’s turned into a major problem for the banks that helped finance the purchase as reported by the Wall Street Journal. Let’s break down what happened and why it matters.

The Deal Gone Wrong
Seven banks, including big names like Morgan Stanley and Bank of America, lent Musk $13 billion to help buy Twitter. Usually, banks quickly sell this kind of debt to other investors, making money on fees. But this time, things didn’t go as planned.

The banks haven’t been able to sell the debt without losing a lot of money. Why? Because Twitter’s financial performance has been weak. This means the loans are stuck on the banks’ books, a situation known in the finance world as “hung” debt.

How Bad Is It?
Pretty bad, actually. According to data from PitchBook LCD, these Twitter loans have been “hung” longer than any similar unsold deal since the 2008-09 financial crisis.

Steven Kaplan, a finance professor at the University of Chicago, puts it in perspective:
“The loans have weighed on the banks for much longer than other hung deals we’ve seen,” Kaplan said. He also noted that this is not only the biggest hung deal by dollar amount since the 2008 crisis but one of the biggest ever.

Why Did Banks Take This Risk?
You might wonder why these savvy banks got involved in such a risky deal. The answer? The allure of working with the world’s richest person was hard to resist. They hoped that banking for Musk could lead to more lucrative deals in the future, especially with his other companies like Tesla and SpaceX.

The Impact on Banks
This situation has caused several problems for the banks:

  1. Financial losses: They’ve had to write down the value of the loans by hundreds of millions of dollars.
  2. Regulatory scrutiny: Holding high-risk loans attracts more attention from regulators.
  3. Market position: Some banks have fallen in the industry rankings, which can affect their ability to attract future business.
  4. Compensation cuts: At least one bank, Barclays, significantly cut bonuses for its top investment bankers, partly due to this deal.

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Twitter’s Struggles
The core of the problem is that Twitter (now X) isn’t doing well financially. The company has said its value has fallen by more than half, to around $19 billion. Advertising revenue, which used to be Twitter’s main income source, has taken a hit.

Musk himself acknowledged the company’s struggles, stating that the annual interest payments on the loans total around $1.5 billion. That’s a heavy burden for a company already facing financial difficulties.

A Catch-22 for Banks
The banks are in a tricky situation. They want to maintain good relationships with Musk, hoping for future business with his other companies. But Musk’s public comments and actions have made it harder for them to sell the debt.

For example, after Musk’s rant against advertisers last fall, MUFG (one of the banks involved) downgraded its internal credit rating of the loan. This move suggests they’re worried about getting their money back.

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Looking Ahead
As the two-year mark of the Twitter acquisition approaches, the banks still haven’t found a way out of this situation. They’ve discussed restructuring the deal with Musk, but so far, nothing has come of it.