Elon Musk’s $13 billion loan to acquire Twitter, now rebranded as X, has become a severe financial headache for the banks involved, marking one of the most challenging merger-finance deals since the 2008-09 financial crisis. What was meant to be a straightforward financing arrangement has dragged on, reflecting the struggles of the social media platform under Musk’s ownership.
The Deal and Its Fallout
In October 2022, Elon Musk finalized his purchase of Twitter with a $13 billion loan provided by a consortium of major banks, including Morgan Stanley, Bank of America, and Barclays. These banks lent the money to Musk’s holding company to facilitate the acquisition, expecting to quickly offload the debt to other investors and earn fees in the process.
Typically, such loans are sold off rapidly to avoid long-term exposure. However, nearly two years after the acquisition, the loans are still on the banks’ books. This prolonged retention is the longest period of unsold debt financing since the global financial crisis, according to PitchBook LCD data.
Why the Debt Remains
The primary reason the banks have struggled to offload the debt is Twitter’s underwhelming performance under Musk. Since the takeover, X has faced significant operational and financial difficulties. This decline has made the debt an unattractive investment for potential buyers. Initially, the deal seemed promising due to Musk’s financial clout, but as the platform’s value plummeted, the loans became a burden. Banks have been forced to write down the value of these loans, accepting that they may not recover the full amount.
Impact on the Banks
The ongoing presence of these loans on the banks’ balance sheets has had notable effects. The unsold debt ties up substantial capital, limiting the banks’ ability to engage in other lucrative mergers and financing deals. This constraint has been particularly challenging in a competitive market that relies on fluid capital to drive profits.
Furthermore, the financial strain from these unsold loans has impacted the compensation of investment bankers. Reports indicate that M&A bankers at the affected institutions have seen their pay slashed by up to 40% in 2023 compared to the previous year. The lingering Twitter debt has been a significant factor in these reductions.
X’s Financial Struggles
Under Musk’s management, X has faced numerous controversies and operational changes, which have not improved its financial situation. In the first half of 2023, X reported $1.48 billion in revenue, a 40% drop from the previous year. The platform’s value has nosedived from the $44 billion Musk paid to about $12.5 billion.
A major issue has been the loss of advertisers. Musk’s management style and platform changes have driven away both users and advertisers. The decline in advertising revenue, a crucial income source for Twitter, has exacerbated the platform’s financial woes. Musk’s harsh remarks towards departing advertisers and subsequent legal actions have further complicated the situation.
Looking Ahead
Although the banks continue to receive interest payments on the loans, the prospect of recovering the full principal remains uncertain. With the loans set to mature in the coming years, lenders are preparing for potential losses. Some estimates suggest that banks might face around $2 billion in losses if X cannot repay the debt.
The deal has also affected the banks’ standings in the financial industry. Morgan Stanley and Bank of America, which were prominent lenders in the deal, have lost their top spots in global banking rankings to competitors like JP Morgan and Goldman Sachs, who did not participate in the Twitter financing.
Personal Impact on Bankers
The fallout from the deal extends to individual bankers. For instance, top investment bankers at Barclays faced a 40% reduction in their compensation last year, highlighting the personal financial impact of the Twitter acquisition. This situation underscores the risky nature of high-stakes financial maneuvers.
