Twitter Buyout Revives $12.5 Billion Headache for Wall Road Banks

(Bloomberg) — Elon Musk’s shock proposal to proceed along with his acquisition of Twitter Inc. for the unique provide value poses a headache on the worst doable time for Wall Road banks already struggling to dump billions of {dollars} in buyout debt they dedicated to in higher occasions.

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After months of authorized drama in an try to again out of the deal, billionaire Musk is now prepared to purchase the social-media big for $54.20 a share. In a letter his attorneys despatched to Twitter, Musk’s acquisition is now pending “receipt of the proceeds of the debt financing.”

Meaning it’s now time for a bunch of Wall Road banks led by Morgan Stanley to step up. They dedicated debt financing for the deal again in April, with the intention to promote most of that to institutional buyers.

If phrases of the unique $12.5 billion financing package deal stay the identical, bankers could wrestle to promote the dangerous Twitter buyout debt simply as credit score markets start to crack. With yields at multiyear highs, they’re doubtlessly on the hook for tons of of hundreds of thousands of {dollars} of losses on the unsecured portion alone, ought to they attempt to unload it to buyers.

The Twitter debt package deal is the biggest in a roughly $51 billion pipeline of dangerous dedicated financings that banks must promote to asset managers, in accordance with Deutsche Financial institution AG estimates.

All of it threatens to gasoline a wider fallout in company debt markets. New points have come to a digital standstill given muted investor urge for food and rising balance-sheet constraints on the massive banks because the Federal Reserve ramps up rates of interest.

Learn extra: Confused by Musk’s Twitter LBO? Right here’s What’s Bizarre: QuickTake

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“It’s much like a vegetarian going to a steakhouse: Very restricted urge for food,” stated John McClain, a high-yield portfolio supervisor at Brandywine International Funding Administration, referring to investor demand for buyout debt. “Given the incremental firm particular information circulate for the reason that deal was agreed to — mixed with the significant deterioration within the economic system — lenders might be very hesitant to offer financing.”

The newest model of the Twitter debt package deal introduced in April features a $6.5 billion leveraged mortgage, $3 billion of secured bonds, and one other $3 billion of unsecured bonds, with the latter notably difficult to promote in latest months because the capital construction is riskier.

Banks had initially deliberate to promote all that debt to institutional asset managers. As well as, banks are offering a $500 million revolving credit score facility that they plan to carry.

A spokesperson for Morgan Stanley declined to remark. Representatives for Twitter and Musk didn’t instantly reply to a request for remark.

The group of banks was already dealing with potential losses of tons of of hundreds of thousands of {dollars} on the riskiest unsecured bonds in the event that they needed to promote the debt at present market ranges. They promised a most rate of interest of about 11.75% on the unsecured bond portion, Bloomberg reported, however CCC debt now trades on common at round 15%, in accordance with Bloomberg knowledge.

Learn extra: Musk’s Debt Bankers Would Keep away from Steep Losses If Deal Fails (1)

Twitter shareholders voted Sept. 13 to just accept the buyout provide as Musk initially submitted it. Relying on the deadline of the deal, banks can have a restricted period of time to dump the debt to buyers. That may drive them to fund the financing themselves — as is predicted on one other massive buyout deal within the pipeline for Nielsen Holdings Plc.

Wall Road has been struggling to dump leveraged buyout debt in latest months. A part of the package deal for Citrix Methods Inc., for instance, bought in September at a steep low cost and left the banks holding about $6.5 billion of debt and realizing roughly $600 million in losses. Shortly after, a bunch of banks obtained caught with roughly $4 billion of bonds and loans tied to an Apollo International Administration Inc.-backed buyout that wasn’t capable of garner a lot demand and was pulled from the market final week.

Because the economic system continues to tip towards a downturn, buyers have shied away from dangerous transactions and are as a substitute placing cash into higher-rated credit. Some high-yield managers are even allocating money to investment-grade obligations provided that these corporations are greatest positioned to climate a recession and are providing yields at ranges not seen in additional than a decade.

(Updates all through with Musk’s official letter he’s going by means of with the acquisition.)

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