Banks prepare to hold $12.7B Twitter debt on books until early 2023(ft.com)
ft.com
Banks prepare to hold $12.7B Twitter debt on books until early 2023
https://www.ft.com/content/d1879d0c-c52e-4f48-82f0-09458add4aee
7 comments
https://archive.ph/JS62V
This is one of those "when you owe the bank $12.7B it's the bank's problem" situations. What happens if they fail to sell on the debt, will there be provisions to claw back the money from Musk or Twitter?
You can't really "fail" to sell the debt. The way that you offload debt is you say "Hey, I've got this $1Bn debt, the term is 5 years, and pays 7% interest (probably a coupon), and is owed by Twitter, oh and here are a bunch of terms and conditions". Normally what happens is people go "Ok, I'll buy that debt off you, I'll give you $1Bn." So the debt is trading at face value.
That's the ideal situation for the bank, they provided the debt financing for Musk, and they've offloaded the risk, maybe they even make a little profit.
What can happen though, is investors say "Hey, interest rates have gone up, Twitter looks really unlikely to be able to service this debt, so we don't think that debt is good, we'll offer you $600m for that debt". This is the debt trading below face value, and indicates investors think either Twitter is unlikely to be able to service the debt, or that the terms aren't good compared to other interest rates.
So the bank absolutely can sell off this debt, and it would get the risk off their books, but they'd take a significant loss - they've lent out $1Bn and got paid $600m. So instead of selling it and realising a massive loss, they'd rather keep the debts on their books until more favourable conditions.
If, as you say, they don't sell the debt, Musk just continues paying the interest to them, unless he defaults in which case they get whatever he secured the debt against - which in this case means a bank would end up owning Twitter.
That's the ideal situation for the bank, they provided the debt financing for Musk, and they've offloaded the risk, maybe they even make a little profit.
What can happen though, is investors say "Hey, interest rates have gone up, Twitter looks really unlikely to be able to service this debt, so we don't think that debt is good, we'll offer you $600m for that debt". This is the debt trading below face value, and indicates investors think either Twitter is unlikely to be able to service the debt, or that the terms aren't good compared to other interest rates.
So the bank absolutely can sell off this debt, and it would get the risk off their books, but they'd take a significant loss - they've lent out $1Bn and got paid $600m. So instead of selling it and realising a massive loss, they'd rather keep the debts on their books until more favourable conditions.
If, as you say, they don't sell the debt, Musk just continues paying the interest to them, unless he defaults in which case they get whatever he secured the debt against - which in this case means a bank would end up owning Twitter.
Musk borrowed at 11.75%, but selling on that kind of debt would now be ~14%. In the short term they can fund that at a few % and collect the difference and if Musks twitter announces some new way to monetise its users they will be able to sell it on much easier for a comfortable 9-10 figure profit.
Between now and then, the risk of Elon Musk / The Crown Prince of Saudi Arabia allowing their company to default are practically zero.
Between now and then, the risk of Elon Musk / The Crown Prince of Saudi Arabia allowing their company to default are practically zero.
The money will be clawed back from...Tesla shareholders.
"Musk’s Twitter financing tests Wall Street’s mettle: ‘What could go wrong?’" (April 2022) - https://www.ft.com/content/f60b6385-eef6-461e-9fcc-b3cb999a7...
"Musk’s Twitter financing tests Wall Street’s mettle: ‘What could go wrong?’" (April 2022) - https://www.ft.com/content/f60b6385-eef6-461e-9fcc-b3cb999a7...
They don’t need to claw back the money as long as Twitter services the debt.
"Elon Musk has taken on two seriously difficult problems with Twitter" - https://www.ft.com/content/78c3db8c-2ec7-4995-9b4b-fe1120a7f...
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https://archive.ph/jpaMv