The money that Elon Musk borrowed to buy Twitter turned into the worst merger financing deal for banks since the 2008-2009 financial crisis.
Seven banks, along with Morgan Stanley and Bank of America, lent money to the billionaire’s holding company to take the social network, now called X, private in October 2022. Banks that provide takeover loans typically sell the debt to other investors to get it off their balance sheets and earn fees. This time, they were unable to repay the debt without significant losses, mainly due to X’s weak financial performance, so the loan «hung» on their balance sheets.
According to people involved in the deal, the resulting write-downs undermined the banks’ loan portfolios and in one case were a factor in limiting the compensation of the bank’s merger team. The value of Musk’s loans fell rapidly after the $44 billion acquisition was completed. But a new analysis shows how persistent underperformance has put the deal in historic territory.
According to PitchBook LCD, Twitter’s «loans have been hanging around» longer than any similar unsold deal since the 2008-2009 financial crisis. Back then, there were many more paused deals, but banks were typically still able to sell or write off most of their paused debt within about a year of issuing the loans. One of the pending deals, a $20 billion debt purchase in 2007, ended in bankruptcy about 12 months after the banks provided the funds.
According to those involved, the banks agreed to sign the deal, which even Musk said was overpriced, largely because the lure of banking with the world’s richest man was too tempting to pass up. Musk and other investors invested about $30 billion to buy the company and gave the banks a certain «cushion» in case something went wrong.
The Twitter loans, along with other high-profile deals, once helped some banks to improve their positions in investment banking leagues. Rankings are a major part of how banks advertise themselves to clients and can affect compensation. Dealogic, Bank of America, and Morgan Stanley held the top two spots in the U.S. investment banking league tables in 2021 and 2022 for several quarters before Musk bought Twitter. In 2023 and 2024, JPMorgan and Goldman Sachs, which did not finance the Twitter deal, retained the top positions.
Banks Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho, and Société Générale were able to get significant interest on X loans. They are usually for seven to eight years and have rates several percentage points higher than for investment-grade companies. Therefore, the banks will suffer little damage if X is able to cover its interest obligations and repay the principal when the loan comes due.
But almost two years after Musk’s acquisition, X’s business is still struggling to get out of the deep hole it fell into under his ownership. Last year, the company said its value had fallen by more than half, to about $19 billion. While recent data shows that use of the platform has increased amid the explosion of political news in recent weeks, there is no evidence that this will lead to a significant recovery in ad revenue. Some of Musk’s public comments and tweets have made it difficult to sell the debt.
As the two-year maturity of Twitter loans approached, banks were unable to resell them, even though their value had decreased by hundreds of millions of dollars. The debt is a drag on banks’ profits, and keeping high-risk loans directly on the balance sheet draws more attention from regulators. Suspended loans have also cut into the annual earnings of some investment bankers.
Early last year, at a New York dinner, Barclays’ top investment bankers from the M&A group were told that compensation for all attendees would be cut by at least 40% compared to the previous year. The bank had several suspended deals that negatively impacted its performance, but X was by far the biggest of them all. According to witnesses, after bankers were paid bonuses for the year, about 50 of Barclays’ more than 200 senior executives left the firm.
Earlier this year, the banks discussed a possible restructuring plan for the deal, under which Musk could repay some of X’s outstanding debt and the banks would agree to reduce interest payments. But X did not fulfill the plan.
On the one hand, banks are eager to get opportunities to work with Musk and his six companies. In particular, many have been tempted by a possible initial public offering of SpaceX or Starlink as a fee-generating event that investors don’t want to miss.
Source: The Wall Street Journal