The money Elon Musk borrowed to buy Twitter was the worst bank merger financing deal since the 2008-2009 financial crisis.
Seven banks, including Morgan Stanley and Bank of America, provided loans to the billionaire’s holding company to take the social network, now called X, private in October 2022. Banks that provide acquisition loans typically sell the debt to other investors to take it off their balance sheets and earn a fee. This time, due mainly to X’s poor financial performance, the banks were unable to repay the debt without taking heavy losses, so the loan “remained” on the banks’ balance sheets.
The resulting impairments hurt the banks’ loan portfolios and, in one case, limited compensation for the bank’s merger team, according to people involved in the deal.The value of Musk’s loans fell sharply after the $44 billion deal closed, but a new analysis shows that continued underperformance has pushed the deal into historic territory.
According to PitchBook LCD, Twitter’s “loan has been stuck on the books for the longest time of any similar unsold deal since the 2008-2009 financial crisis.” There were many more moratorium deals back then, but banks were typically able to sell or write off most moratorium debt within a year of issuing the loan. One of the pending deals, a $20 billion debt purchase in 2007, ended in bankruptcy about 12 months after the banks provided the funds.
The banks agreed to sign a deal that even Mr. Musk said was too expensive, mainly because the allure of doing business with the world’s richest man was too enticing to turn down, according to people familiar with the matter. Mr. Musk and other investors invested about $30 billion in buying the company, giving the banks some “cushion” in case something went wrong.
Twitter’s loans, along with other high-profile deals, once helped some banks improve their standing in the investment banking league. Rankings play a big role in how banks promote themselves to clients and can also affect compensation. For several quarters in 2021 and 2022, before Musk acquired Twitter, Dealogic, Bank of America and Morgan Stanley held the top two spots in the US investment banking league. In 2023 and 2024, JP Morgan and Goldman Sachs, which did not fund the Twitter deal, held the top spots.
Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho, and Societe Generale were able to earn handsome interest on X’s loans. The loans were usually for 7-8 years, and the interest rates were a few percentage points higher than investment-grade companies. So, as long as X made the interest and principal payments on the loans when they came due, the banks’ losses would be small.
But nearly two years after Musk bought it, X’s business has struggled to climb out of the deep hole it fell into under his ownership. Last year, the company announced its value had more than halved, to about $19 billion. Recent data has shown that the explosion of political news in recent weeks has led to increased usage of the platform, but there’s no evidence that this will translate into a meaningful recovery in advertising revenue. Some of Musk’s public comments and tweets have made the stake sale difficult.
Musk said annual interest payments would be about $1.5 billion.
As the two-year maturity of the Twitter loan approached, banks were unable to resell it, even though its value had fallen by hundreds of millions of dollars. The debt was eating into banks’ profits, and keeping risky loans directly on their balance sheets would draw more regulatory attention. The lending freeze is also hurting some investment banks’ annual earnings.
At a dinner in New York early last year, the top investment bankers in Barclays’ M&A group were told that everyone in attendance would have their compensation cut by at least 40% from the previous year. The bank had several suspended deals that had hurt its performance, but X was by far the biggest of them all. After the bankers were paid their bonuses for the year, about 50 of Barclays’ more than 200 senior executives left the firm, according to witnesses.
Earlier this year, the banks discussed a plan to restructure the deal, in which Musk would have paid off some of X’s outstanding debt and the banks would have agreed to reduce their interest payments. But X never followed through on the plan.
Meanwhile, banks are eager for the opportunity to work with Musk and his six companies, especially with many interested in a potential SpaceX or Starlink IPO as a fee-earning event that investors won’t want to miss.
Source: Wall Street Journal