Provided junk debt financing for Musk’s acquisition of Twitter, many banks may suffer losses – yqqlm

Beijing time on the morning of May 27th, according to reports, in the transaction plan of Elon Musk’s acquisition of Twitter,Banks led by Morgan Stanley agree to provide Musk with $13 billion in debt financing. However, if they are forced to package this debt to investors amid the current market risk aversion,then you may suffer losses.

In the agreement between the lender and Musk, the maximum interest rate on the underlying $3 billion unsecured loan was 11.75%, according to people familiar with the matter.This part of the debt may be packaged into a “CCC” rated junk bond. However, the average yield on similarly rated junk bonds soared above 12% last week as investors were pulling out of riskier assets amid fears of high inflation, a possible recession and the fallout from the Russia-Ukraine conflict.

The source said,Selling bonds at yields higher than 11.75% could result in banks not earning underwriting fees for the dealand if the yield had to rise above 12.125%,Banks will directly lose money.

Morgan Stanley and other members of the group of underwriters, including Bank of America, Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho Financial Group and Societe Generale, declined to comment on the claims. Musk’s family office and Twitter have yet to respond.

For now, banks are not under pressure to package and sell these debt financings, and market conditions are likely to improve in the coming months. Even if part of the deal loses, the overall financing package is not necessarily unprofitable for lenders. However, the bigger uncertainty is that although the two sides have reached an agreement to complete the transaction this year,But Musk has repeatedly expressed doubts about whether the deal will be finalized.

In financing packages for a handful of mergers and acquisitions, such as Musk’s acquisition of Twitter, large buffers were built within banks and interest rate caps were guaranteed to borrowers. Among them, unsecured debt tops out at double-digit rates. Earlier reports suggested that bank financing options for other deals, such as the Citrix acquisition, could lead to bigger losses when markets were better earlier this year.

The banks that agreed to provide Musk with debt financing are also seeing some positive news that more of the overall financing package will come from equity rather than debt. According to a filing with regulators on Wednesday,Musk drops plans to secure loans with Tesla sharesraising the equity portion of the deal directly to $33.5 billion.

According to data compiled by Bloomberg, the yield on “CCC” rated junk bonds soared to nearly 12.4% on Monday, the highest level since July 2020. However, that rate fell back to 11.95% by Wednesday. “CCC” is the lowest rating for junk bonds. At the same time, investor appetite for new bond issuance has waned, forcing borrowers to focus more on private credit markets for debt financing.