Musk’s banks will account for Twitter loan losses to minimize costs
According to three sources with firsthand knowledge of the issue, some of the banks that gave Elon Musk a $13 billion loan to purchase Twitter are getting ready to report losses on the loans this quarter while doing so in a way that prevents it from having a significant impact on their earnings.
Such loans are often sold by banks to investors at the time of the transaction. Market participants warned that if Twitter’s lenders, lead by Morgan Stanley, attempted to do so now, they might suffer billion-dollar losses because investors are reluctant to purchase riskier debt during a time of economic uncertainty. In addition, Twitter has lost advertisers due to concerns about Musk’s method of monitoring messages, which has a negative impact on revenues and the company’s capacity to pay interest on the debt.
The loan must still be valued at market value on the books of the bank, and money must be set aside for losses that are disclosed in quarterly results. According to the three people who are aware with the procedure for calculating the value of such loans, each bank can choose how much to write it down based on its market checks and judgment in the absence of a price established by actual sales of the debt.
According to one of the individuals, the largest portion of the debt, $10 billion in loans secured by Twitter’s assets, may need to be written down by as much as 20%. According to the source, most businesses could likely manage the loan’s hit, which was split across seven banks, without suffering a major loss in earnings.
One more of the three persons who had firsthand knowledge of the situation predicted that certain banks might only accept a 5%–10% writedown on the loan’s secured part.
It has not previously been disclosed on the considerations some of these banks are making over how to account for these losses. They occur at a time when Wall Street banks are anticipating lower fourth-quarter earnings as a result of a decline in investment banking revenue and an increase in loan-loss reserves in the context of a slowing global economy.
The remaining $3 billion, which is unsecured, might result in greater losses for the seven Twitter banks, according to three banking sector sources. Reuters was unable to ascertain the amount by which the banks intended to write down the unsecured portion of the debt.
According to one of the persons familiar with the discussions, the lenders have thought about replacing the unsecured portion of the debt with a loan to Musk secured by his shares of the electric vehicle manufacturer Tesla Inc (TSLA.O). Musk, though, has stated that in the current financial context it is advisable to avoid such loans. Bloomberg previously covered the potential for a margin loan.
Bank of America Corp (BAC.N), Barclays Plc, Mitsubishi UFJ Financial Group Inc (8306.T), BNP Paribas SA (BNPP.PA), Mizuho Financial Group Inc (8411.T), and Societe Generale SA are also members of the syndicate in addition to Morgan Stanley (SOGN.PA).
Responses to email requests for comment from SocGen, Musk, and Twitter representatives were not received. The other banks’ representatives opted not to comment.
Credit: Reuters
