Elon Musk’s $12.5 billion margin loan to buy Twitter is risky even for him

  • Elon Musk finances most of the Twitter takeover bid with debt, including a $12.5 billion personal loan.
  • This margin loan, secured by his stock from Tesla, was completed in 6 days.
  • Here’s why this unprecedented personal loan is so risky, even for the richest person in the world.

Last Thursday night, Elon Musk decided how he would fund his hostile takeover of Twitter. A source familiar with the situation told Insider: He gave Morgan Stanley, his longtime bank, less than a week to get the loans needed to buy the social media giant.

Within six days, Morgan Stanley terminated $25.5 billion in debt obligations, which were disclosed in today’s SEC filing. The loans include $12.5 billion secured against Musk’s Tesla stock and another $13 billion that will be slow on Twitter if Musk succeeds. The richest person in the world agreed to cover the remaining $21 billion.

The source told Insider that interest from banks to participate in the loan was high — given another week to arrange the financing, it is likely that “the whole street” will be involved.

A representative for Musk did not respond to Insider’s request for comment in time for publication.

Margin loans in the billions are unheard of, even for the wealthy

Margin loans of this size are usually offered to businesses. For example, SoftBank recently secured an $8 billion loan guaranteeing its shares in its semiconductor unit, Arm. No one, not even a billionaire, has ever heard of a $12.5 billion marginal loan. With a loan-to-value ratio of 20%, Musk will have to put up about 64 million Tesla shares — about a third of his stake — as collateral.

Wealthy individuals typically use securities-based lines of credit to finance their lifestyles, such as buying real estate, without divesting and incurring equity investments.


capital gains

tax.

Musk, a billionaire famous for being “cash poor,” has borrowed against Tesla stock for years. As of February 12, 2020, according to Tesla’s latest prospectus, he had $548 million in outstanding balances with Morgan Stanley, Goldman Sachs, and Bank of America.

It’s a risk for Musk and Tesla shareholders

Even for Musk, he raised his personal loans against volatile Tesla stock — the electric car company once lost $109 billion in


market cap

In a day – is a risky move. According to the margin loan commitment letter, if the value of the pledged shares drops to $35.7 billion or less, Musk will have two business days to provide more collateral, repay some of the loans, or sell the secured shares. (He’s also in a bind with nearly $1 billion in debt services annually, according to a calculation by Bloomberg’s Matt Levine.)

Margin calls can hurt shareholders if the borrower chooses – or is forced to – sell the stock. For example, in 2012, after the shares of Green Mountain Coffee Roasters fell, the company’s chairman, Robert Stiller, was forced to sell 5 million shares due to a margin call from Deutsche Bank. He was dismissed from the position of Chairman of the Board of Directors for selling his shares during the blackout period.

Banks can take big hits on these loans, too. In 2017, four banks, including Bank of America, reported a combined loss of more than $1 billion from a $2 billion loan to Christo Wise, chairman of Steinhoff International Holdings in South Africa, the Wall Street Journal reported. . Pawned shares of Steinhoff, which owns Sleepy’s and Mattress Firm, fell after the company disclosed regular accounting procedures.

Some companies forbid insiders to pledge shares to secure personal debts to protect shareholders. Tesla has a policy that limits loans to 25% of the value of the pledged stock in order to mitigate risk.

When asked about the potential risks of the loans, the source told Insider that it was a vote of confidence in Musk’s decision to buy Twitter.

“The general point is that the reason the Bank Group takes this so well is because people think Twitter is an incredibly powerful resource,” they said.

The source compared the term loan to finance Twitter with the backed acquisition of software giant Citrix.

“It’s just a big cash flow-backed bond bank deal with similar leverage,” they said.

Morgan Stanley, the major lender, has been lending to Musk for more than a decade

But Musk is no stranger to risk, and he has longstanding ties to Morgan Stanley, which has made loans to him since May 2011, as noted in a 2016 Tesla prospectus. As a lead regulator among 12 banks, Morgan Stanley set aside $5.5 billion between a margin loan for Musk And loan to Twitter on the acquisition condition. The head of the Musk family office, Jared Birshall, worked for Morgan Stanley from 2010 to 2016 before leaving to run the company, called Excession LLC.

Other banks bound by the margin loan agreement include Bank of America and Citibank.

There have been two notable exceptions: JPMorgan and Goldman Sachs, which have made personal loans to Musk in the past. Both have conflicts of interest as JPMorgan has a revolving credit facility with Twitter, as noted in an exhibit in the filing, Goldman Sachs advises Twitter.

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