Elon Buys Twitter - Citrix 2.0
Assuming markets do not miraculously take a 180, this is gonna be an absolute blood bath similar to Citrix. Top underwriters are Morgan Stanley & BoA.
Anyone hearing anything out there?
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Not a lev fin guy, but anyone know if these banks are locked into their debt commitments (at the same rates) as when the deal was originally agreed to? If so, seems like they’ll lose billions here. Twitter is a way worse lbo candidate then Citrix and unprofitable, not to mention it’s Elon vs some top PE firms. It’s also 4x the size. Seems like an absolute nightmare for these banks?
Yup, it is underwritten financing and yes it was agreed way back in the spring. I don’t know all the pricing & flex details, but assume as you said this could potentially be a massive loss event for the banks in the underwriter group.
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if this deal goes to market the banks will likely be forced to hold rather than syndicate. they will get slaughtered.
Can someone explain how the banks would lose money? I'm assuming Musk had to put up his personal assets as collateral if Twitter couldn't service the debt he's putting on it. Even if the banks can't sell off the debt to others, wouldn't the banks still be able to collect all the interest on the loans?
When the banks (led by Morgan Stanley) underwrote the debt, they agreed to syndicate at a certain rate (SOFR + xxx bps) that also usually has a provision for some leeway via OID and interest rate flex if the market turns sour and/or demand dries up. The leveraged loan market has effectively collapsed and shut down since they agreed to those terms back in the spring, and rates have gone through the roof. Thus, they are in for potentially billions of dollars worth of losses because even in their flex case they’ll be forced to issue the debt at an enormous discount to par (because credit investors are now demanding much higher yields than the prevailing rates back when the deal was underwritten). This is the chief risk of underwriting and why banks get paid a much higher fee for it as opposed to merely a best efforts deal where they don’t take balance sheet risk. Hope this helps.
They're locked in.
As for how bad this is, I agree with you directionally but a few mitigants:
1. Twitter's low profitability (sometimes negative, sometime just low) owes in large part to SBC. So it generates cash, for the time being.
2. It's one of the worst managed companies ever, and I know this not just from the general public knowledge but also from having a family member who was there until recently. Any reasonably competent CEO will be able to slash opex and capex.
3. They've done a horrible job getting ad clients. But for those that *do* use it, it's pretty sticky. Like if you've decided to invest in having a brand-building effort on Twitter, that's not something you can just move elsewhere. Very little overlap with Instagram userbase.
So not a great situation for those banks but better than Citrix in my opinion.
Spoke to an underwriter on this deal and I believe they have through March to market the deal, so if you assume Q1 is an improving market environment then perhaps there’s room to cut potential losses. Anecdotally he also said they have wide caps on the deal, and they can obviously sell through fees, but idk the actual details so I have my doubts.
I’m expecting the bank group to take a large loss on this one given the magnitude of the debt financing, credit / leadership concerns, and how far the market has shifted.
It’s a great point though, I was unaware that this had until March. I don’t expect the market will take a swing back to the levels of 2021, but I also don’t see bond markets getting much worse form here. It’s already one of the poorest performing asset classes out there.
Right and every investor’s budget resets to zero come Jan 1, so there will be demand out there to put dollars to work, however, that demand may not be at the underwritten terms of the Twitter deal.
I wholeheartedly agree bond market can’t get much worse…the probability of it getting better is greater than the probability of it getting worse is how I like to frame it.
That said, rates are only going to go up further which puts Twitter’s underwritten terms at an even greater disadvantage, one would think. Deal funds long or goes at a steep discount is my call as an outsider.
I’m curious to see what happens to Nielsen and Tenneco in the near term…haven’t heard much and thought the deadline was mid October so seems like those may fund long.
Wanted to follow up here and say that I was told today that financing parties have to fund within 10 days of purchase agreement being executed. I haven’t combed through the PA myself so just taking someone else’s word for it, now I’m not sure about March being a deadline as it seems banks may have to fund long no matter what and try to sell down post close. Idk whole thing seems fubar either way given the credit. Bloomberg saying 11.75% is the cap on the unsecured and I would assume this ends up priced wider than citrix so don’t think that will get the job done (though they can sell through fees of course too)
Are people at the banks (especially in lev fin) sweating this one? Looks like it could blow a $1B+ hole in some firms bonus pools (looks like MS might be the big loser here?). A lot of the same banks are on this + Citrix so wonder if we’ll start to see actual issues stemming from these
Banks involved are def sweating. The main difference between this and citrix (aside from credit/fcf etc related items) is Twitter has 7 underwriters while Citrix has 30+. Running the math, the PnL is going to get ugly, but like every other deal, this will most likely be a funded transaction. The lead banks all have outsized economics here.
Can’t tell if this is satire, but if you are actually blaming liberals for the Twitter financing going south at a time when all debt transactions are in the shitter, you need to get offline my guy
Satire or not (I dont' know, I think not) he isn't blaming liberals for the financing going south. He's blaming liberals for creating the circumstances that made Elon interested in buying Twitter.
I support receiving reward for risk in free, capitalistic markets except when I lose! Then it's someone else's fault I lost!
Believe MS as Elon's main bank has 30% economics here. My rough calcs assuming similar pricing to Citrix gets to a combined $1,100 loss net of fees, with most of that from the bonds. Now it's likely that the banks will take some portion and hold on balance sheet by flipping to TLA- likely some of the secured bonds. Still this could be $300mm loss for MS.. way more than they ever made from Musk- unless he's paying them some ridiculous side fee on M&A as well.
As side comment my bank like many others were offered sizable portion of financing by MS, 5-10% but we turned it down back in April. The presentation to the banks was a complete joke, some dude from Elon's family office and a MS banker had like a 10 minute call with dozens of banks on the line and it was just total BS.
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Will never understand why the libs hate this guy while the right loves him. It seems like it should be the opposite. I mean mainly he is the green energy meme dude who is literally the biggest pusher of "oil = bad" as he stands to financially benefit from ESG. But now on top of that this madman got a bunch of big banks to agree on an interest rate back before rate hikes, then he deliberately stalled on the deal with a lawsuit due to "hmm... there are bots in my bot website? Why?" and now immediately after the FED does another hike he goes "Ok nvm, execute the deal" to absolute fuck all of those rent-seeker bankers.
It seems like this guy should be lefty messiah.
Maybe that's why he shifted to the right at the right time. Left will buy anything green, so he can concentrate on selling his cars to the more difficult demographic
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