The banks helping finance Elon Musk's Twitter takeover plan to park the $13 billion of debt backing the deal on their balance sheets rather than selling it at a loss to loan and bond fund managers who have become hesitant over the growing turmoil on the markets, according to sources familiar with the deal.
Musk's $44 billion takeover plan is being backed by several banks, including Morgan Stanley, Bank of America Corp., and Barclays PLC, which in April signed agreements to provide Musk with debt financing, and intentionally intended to find third-party investors who would lend the money, reports The Wall Street Journal.
However, banks could lose at least $500 million by trying to sell Twitter's debt using current market prices, the publication has reported in recent weeks, but by holding the debt, the banks will be able to keep it on their books marked at a higher value until prices rebound.
That means the Twitter deal would be the largest stalled agreement to take place, even more than the billions of dollars in debt lenders found themselves stuck with after the 2008 financial crisis.
Investors, amid concerns about a looming recession, are skittish about what they see as risky loans and bonds, and some are seeing Twitter as a risk after Musk's complaints that the company misrepresented its condition and reports that the company's revenues are dropping.
Time is also running short on the deal, with Musk and Twitter having until Oct. 28 to close out the purchase, and there is no guarantee that he won't back out. If the deal does not close by the end of the month, the parties go to court in November, but either way, the banks would not have enough time to sell the debt to third-party investors, which can take weeks, not days.
With the year's end coming up, banks must also be concerned about having risky corporate debts on their balance sheets.
Twitter's debt will include $6 billion in bonds and $6.5 billion in term loans.
Morgan Stanley CEO James Gorman has said his bank is being "quite cautious in the leveraged-finance area" on new deals, and Bank of America’s Brian Moynihan commented that the bank is "working to get through the pipeline" on existing deals, notes the Journal.
Sources told the paper that the banks do have plans to sell off some of the debt in early 2023 if the deal closes and prices in the market improve and could divide the debt, making it easier to sell off.