Musk’s banks to book Twitter loan losses, avoid big hits
Some of the banks that loaned Elon Musk $13 billion to buy Twitter are preparing to post losses on the loans this quarter, but they likely will do so in a way that they won’t Income becomes a major burden for them, according to three sources with direct knowledge of the situation.
Banks usually sell such loans to investors at the time of closing. But Twitter’s lenders, led by Morgan Stanley, could face billions of dollars in losses if they attempt to do so now, as investors balk at buying risky debt at a time of economic uncertainty, market participants said. Additionally, Twitter has seen advertisers flee worries about Musk’s handling of tweet monitoring, beating earnings and his ability to pay interest on the debt.
Banks must continue to mark-to-market the loan on their books and set aside funds for losses, which will be reported in the quarterly results. However, in the absence of a price determined by the actual sale of the debt, each bank can decide how much to write off based on their market reviews and judgement, according to the three sources familiar with the process of determining the value of such loans .
Most of the debt — $10 billion worth of loans secured by Twitter’s assets — might need to be written down by as much as 20%, one of the sources said. The damage to the loan, which is spread across seven banks, could likely be handled by most companies without significantly impacting profits, the source added.
Another of the three sources with direct knowledge of the matter estimated that some banks might only take a 5% to 10% write-off on the secured portion of the loan.
The considerations of how some of these banks think about accounting for these losses have not been previously reported. They come as Wall Street banks brace for lower fourth-quarter profits on a slump in investment banking revenues and a surge in loan loss reserves amid a slowing global economy.
Three banking industry sources said the remaining $3 billion that is unsecured could result in higher losses for the seven Twitter banks. Reuters could not determine how much the banks planned to write off the unsecured portion of the debt.
Lenders have considered replacing the unsecured portion of the debt with a loan to Musk secured by his stake in Tesla Inc, the electric car maker, a source familiar with the talks said. However, Musk has said it’s best to avoid such loans in the current macroeconomic environment. Bloomberg previously reported on the possibility of the margin loan.
In addition to Morgan Stanley, the consortium includes Bank of America Corp, Barclays Plc, Mitsubishi UFJ Financial Group Inc, BNP Paribas SA, Mizuho Financial Group Inc and Societe Generale SA.
SocGen, Musk and representatives from Twitter did not respond to emailed requests for comment. Representatives of the other banks declined to comment.
FLEXIBILITY ACCOUNTING
Accounting standards require banks to mark-to-market the loan when some of them report fourth-quarter earnings in January, several bankers and auditors said.
However, as market activity grinds to a halt, banks have some flexibility in pricing, meaning each could price them differently. They also have leeway in reporting write-offs and the time it takes them to sell the debt. Leveraged loan deals after the 2008 financial crisis took years to resolve.
Each bank would conduct market reviews with two or three potential buyers to arrive at a value of the loans that would require an auditor to agree, one of the three sources said.
The person familiar with the mindset of one of the banks in the lending syndicate added that some lenders would likely take a minor hit first and write it off over time if ratings continue to deteriorate.
Projected losses could also be shared between investment banking and trading desks, making them small enough that they don’t need to be disclosed separately, one of the sources said. Any write-downs would likely be broken up into pieces and spread over several months, reducing the drop in earnings each quarter, said two of the sources with direct knowledge of the matter.
Some market participants expect the debt losses to be significant unless market conditions improve. Two banking industry sources said if the banks tried to sell the loans now, they would get no more than 60 cents on the dollar for the secured bond and an even lower price for the unsecured portion. That would result in billions of dollars in losses for the syndicate as a whole.
In September, Bank of America-led Wall Street lenders suffered a $700 million loss on the sale of approximately $4.55 billion of debt that covered the leveraged buyout of enterprise software company Citrix Systems Inc.
According to two fixed-income bankers, around $35 to $40 billion of such loans are stuck on the banks’ books.
However, Twitter’s bankers are more confident. “I wouldn’t bet against Elon Musk,” Morgan Stanley chief executive James Gorman said in an interview with Reuters NEXT earlier this month. “We don’t stand behind this type of deal and this type of opportunity unless we believe it’s real.”