- Elon Musk is financing most of his Twitter takeover bid with debt, including a $12.5 billion personal loan.
- This margin loan, secured with his Tesla stock, was finalized in 6 days.
- Here’s why this unprecedented personal loan is risky, even for the world’s richest person.
Last Thursday evening, Elon Musk decided how he was going to finance his hostile takeover of Twitter. He gave Morgan Stanley, his longtime bank, less than a week to come together with the loans needed to buy the social media giant, a source familiar with the situation told Insider.
In six days, Morgan Stanley finalized $25.5 billion worth of debt commitments, which were revealed in an SEC filing today. The loans include $12.5 billion secured against Musk’s Tesla stock and another $13 billion that will be slow to Twitter if Musk succeeds. The world’s richest person has agreed to cover the remaining $21 billion.
Banks’ interest in participating in the loan was high — given another week to arrange the financing, “the whole Street” would have likely participated, the source told Insider.
A representative for Musk did not respond to Insider’s request for comment in time for publication.
Multibillion-dollar margin loans are unheard of, even for the uber-rich
Margin loans of this size are usually extended to corporations. For instance, SoftBank recently took an $8 billion loan secured by its shares in its semiconductor unit, Arm. It is unheard of for an individual, even a billionaire, to get a $12.5 billion margin loan. With a loan-to-value ratio of 20%, Musk will have to put up about 64 million Tesla shares – about one-third of his stake – as collateral.
Securities-based lines of credit (SBLOCs) are typically used by wealthy individuals to finance their lifestyles, such as for buying real estate, without divesting from stock and incurring
Musk, a famously “cash poor” billionaire, has borrowed against Tesla shares for years. As of February 12, 2020, according to Tesla’s most recent 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, upping his personal loans against volatile Tesla shares – the electric vehicle company once lost $109 billion in
in one day – is a risky move. According to the margin loan commitment letter, if the value of the pledged stock falls to $35.7 billion or less, Musk would have two business days to put up more collateral, pay back some of the loan, or sell collateral shares. (He is also on the hook for nearly a $1 billion in debt services annually, as calculated by Bloomberg’s Matt Levine.)
Margin calls can hurt shareholders if the borrower chooses to – or is forced to – sell shares. For instance, in 2012, after shares of Green Mountain Coffee Roasters nose-dived, the company’s chairman, Robert Stiller, had to sell 5 million shares because of a margin call from Deutsche Bank. He was removed as board chairman for selling shares during a blackout period.
Banks can take major hits on these loans as well. In 2017, four banks, including Bank of America, reported more than $1 billion in combined losses from a $2 billion loan to Christo Wiese, then-chairman of South African retailer Steinhoff International Holdings, as reported by The Wall Street Journal. The pledged shares of Steinhoff, which owns Sleepy’s and Mattress Firm, plummeted after the company disclosed accounting regularities.
Some companies ban insiders from pledging stock to secure personal debt to protect shareholders. Tesla has a policy that limits loans to 25% of the pledged share value in order to mitigate risk.
When asked about the potential risk 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 the reason this was so well-received by the bank group is people believe Twitter is an incredibly strong asset,” they said.
The source compared the term loan to finance Twitter to the leveraged buyout for software giant Citrix.
“It’s just a big bond bank deal supported by cash flow and with similar leverage ratios,” they said.
Morgan Stanley, the lead lender, has slow to Musk for over a decade
But Musk is no stranger to risk, and he has long ties to Morgan Stanley, which has extended loans to him since May 2011, as noted in Tesla’s 2016 prospectus. As lead arranger among 12 banks, Morgan Stanley has committed $5.5 billion between the margin loan to Musk and the loan to Twitter contingent on the takeover. Musk’s family office head, Jared Birchall, worked for Morgan Stanley from 2010 to 2016 before leaving to run the firm, which is named Excession LLC.
The other banks committed to the margin loan agreement include Bank of America and Citibank.
There were two notable exceptions: JPMorgan and Goldman Sachs, which have extended personal loans to Musk in the past. Both have a conflict of interest as JPMorgan has a revolving credit facility with Twitter, as noted in an exhibit in the filing, and Goldman Sachs is advising Twitter.