WSJ: Elon Musk’s Twitter Takeover Is Now the Worst Buyout for Banks Since the Financial Crisis
New WSJ Article says MS, BOFA, Barclays, MUFG, BNP, Mizuho, Societe Generale are suffering from financing Elon's purchase of X, which is one of the biggest hung deals in history. Also says Barclays had to cut top IB salaries by 40% because of its hung deal, the largest of which was X.
Thoughts? Also am I misunderstanding or does it seem blown out of proportion -- seems like the banks are still receiving their interest payments, so not sure why they're losing so much money
Based on the highest ranked content on WSO, here are some insights related to Elon Musk's business dealings and their impact on financial institutions:
Elon Musk's Negotiation Tactics:
Financial Impact on Banks:
Market Reactions and Investor Sentiment:
Debt and Equity Challenges:
Broader Economic Context:
In summary, while the banks might still be receiving interest payments, the broader financial implications, including potential equity dilution and the strain on cash flow, can lead to significant financial stress. The situation might not be entirely blown out of proportion, given the historical context of Musk's ventures and their impact on financial institutions.
Sources: https://www.wallstreetoasis.com/forum/investing/tesla-q1-earnings-call?customgpt=1, Why so serious?, Lmao Tesla, Credit Suisse is Finally Going to Blow, Musk Master of Misdirection | The Daily Peel | 7/11/22
While it’s true that the banks are earning significant interest payments from the Twitter (now X) loans, the markdowns on this debt have resulted in substantial losses in the reported profitability of all the banks involved. The bonus pool for bankers is derived from each bank's reported profitability, so these losses—even if they are just paper losses—lead to a smaller bonus pool, resulting in less compensation for bankers. This situation has especially fucked Barclays, as the lower banker compensation reportedly led to about 50 bankers leaving the firm, according to the article.
To clarify, while this situation with the X loans might have contributed to Barclays' issues, it's probably far from the only thing fucking them over. Many other missteps likely played a role in their lower profitability and the heavy cuts to banker compensation, which someone at Barclays (or in the industry in general) could explain better.
Essentially, while the banks are receiving consistent interest payments, holding these risky high-yield loans comes with significant downsides. It attracts scrutiny from regulators due to the increased risk on their balance sheets. If the banks were to sell these loans, they would likely have to do so at a substantial discount, leading to major realized losses. And there’s always the risk of a flat-out default if X continues to lose money, which could fuck the banks over even more.
Hi,
The fella above has it, but just to unpack it, and without offering any opinions on Musk, etc. (there's an animated discussion below for those who want that), it might be useful to explain a bit how leveraged financing works. Note that I sit in a coverage team, not a leveraged finance team, so take this with a bit of a health warning (I'm also trying to keep it simple).
Investment Banks are generally not in the business of making loans and holding them on balance sheet. Banks will underwrite (essentially, commit to buy at a certain price) debt financing to fund an acquisition and then distribute / syndicate it to long-term holders (hedge funds, credit funds, a number of other investor types). If they're lucky / smart, they sell that debt at a higher price than what they bought it for, but that's not typical - the market is competitive after all. However, you can be unluckly too.
The IBs are generally underwriting a given bond at a given coupon which reflects current base rates and a spread which reflects the perceived risk of the borrower (in this case, in broad strokes, the risk of Twitter). Let's say the banks arranged a Twitter bond with a coupon of 4% priced with a YTM of 4% (so, at 100). Now, three things (or a combination of them) can happen:
1) The base rate changes (in this case, Musk bought Twitter when rates were low, and when the Fed started raising rates, a YTM of 4% suddenly didn't look so good, even assuming nothing changed about the risk of Twitter. How to remedy this? Well, to achieve the market YTM for a bond of this risk and this 4% coupon, you need to sell it below 100. If the banks bought at 100 and sell at 80, that's a loss (a loss which might not be crystallised if the banks don't sell and just hold it, but it's still a loss on paper). This impacts fixed rate instruments, but not really floating rate notes or other instruments.
2) The risk of the asset changes. There may be a perception (and I'm not offering an opinion) that the risk of Twitter has become a lot higher, and the ability of the company to repay the debt has increased versus when the deal was agreed. Even if the base rate doesn't change, banks may have to sell the same paper which carries a certain spread or coupon below 100 to encourage investors to buy in. That's a loss.
3) Banks mis-priced the deal. Banks will reach out to investors to get a sense for where the market is on Twitter debt before the deal is agreed. The banks' own investment committees will agree to the risk that they will underwrite financing at a certain coupon / spread / etc. and be able to sell it on to investors and earn their arrangement (and let's be honest, M&A advisory) and other fees. Banks might have just gotten the appetite wrong and committed to something they shouldn't have. In theory shouldn't happen, but it does.
Great write-up, thank you for taking the time to do that.
One question though, in scenario 2 did you mean increases? Would think it would be decreases. Just want to make sure I’m understanding correctly
Aww. Anyway lol
lol
This is among the least surprising things to have happened. Elon is not competent (outside of one very specific competency), and these loans were made in basically the ultimate "trust me bro" situation. Obviously, these loans weren't going to do well. The title is a bit hyperbolic, but the actual substance is on point. The market has torpedo-ed the value of the debt and this was done largely due to Elon's incompetence.
Dude chose to destroy the business of Twitter. This is a natural consequence of that.
How is the business destroyed? Twitter was a financial loser when Musk bought it. Now he lets people speak freely about controversial topics. If the business is doing worse it's because pro-censorship people (you?) went after his advertisers.
Lol. Denial isn't just a river in Egypt.
Can you imagine if a conventional liberal had done this and wiped out like 90% of Twitter's value? The hypocrisy is just stunning.
Right. So Mr Musk bears no responsibility, got it.
So your explicit argument is that advertisers are required to keep paying for ad space, even if the customers they're advertising to are leaving said platform in droves? I know the answer, of course, but if Fox started doing nothing more than parroting what Mr Biden or Mrs Harris or the DNC said in their press releases, and praising them all as the next coming of Jesus and Mr Trump as an evil cartoon character and free market capitalism as a failed experiment, presumably you'd stop tuning in. Why are liberals required to support Mr Musk's shitty views?
Modern conservatism in a nutshell - anything good is my doing, anything bad is someone else's fault. The one redeeming quality of conservatives in the early part of the century was the at least nominal commitment ot personal responsibility, which is now the sole preserve of the left.
Insane that they financed it with no sort of proper business plan or anything
I'm curious what would have happened if Musk just fired all the engineers and cut costs without the political side of things.
IMO he'd be doing a lot better with advertising revenue but you still need people to know how to run a site. Both his DeSantis campaign launch and recent Trump interview were technical disasters. More or more quality engineers would have made those far smoother.
My guess is that they can barely service debt from operating cashflow. There was a good chunk of cash on balance sheet at close but probably worked through that by now. Banks are really caught in a bad situation. Musk has them by the balls as I'm sure the banks wouldn't want to take this flaming pile of crap over if Musk gets bored and hands them over the keys.
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