What to know about Elon Musk's $12.5 billion margin loan

[LetMyPeopleVote]

Link to tweet

https://fortune.com/2022/05/02/elon-musk-margin-loan-morgan-stanley/

Elon Musk, who submitted the letter to buy Twitter in April, effectively rolled the dice to land the billions of dollars in loans he needed to get his offer in front of the social media network’s board. In order to secure the $12.5 billion margin loan on his Tesla shares, Musk gave a personal guarantee, according to reporting from my Fortune colleagues, published this weekend. Here’s what that means: If Musk can’t repay the loan by selling shares of Tesla, banks could take Musk's equity stake in Twitter, his 46% stake in SpaceX, his sundry personal assets—anything.

[LetMyPeopleVote]

1. Tesla is now trading below $700 during premarket trading. 👀

Tesla was above $1000 per share when Musk first made an offer for Twitter

Link to tweet

[jimfields33]

2. Ok. So it's not great for him to do this

But I hope that we don’t start saying that nobody can do this. I used 3,000 dollars last year from my stocks to paint my house. I paid the it back interest free plus no taxes. Most regular everyday people do this. I think it’s be a mistake for the government to make this illegal because one guy did it that nobody likes.

[Torchlight]

8. Is there anything of substance suggesting nobody at all should do this?

People use cars everyday. A few use them nefariously, yet no one at all is suggesting cars should be outlawed due to those few.

[Tomconroy]

3. Musk offered $54 for twitter. It now sells for 45 and change.

The market is saying that Musk ain't going to buy it.

[LetMyPeopleVote]

6. The market has doubts about this deal

[bucolic_frolic]

4. If a billionaire can't keep his financial info private, what's the world coming to?

[LetMyPeopleVote]

5. This is an acquisition of a public company

The financing of such an acquistion has to be disclosed

[FBaggins]

7. So?

Here’s what that means: If Musk can’t repay the loan by selling shares of Tesla, banks could take Musk's equity stake in Twitter, his 46% stake in SpaceX, his sundry personal assets—anything.

Incorrect. If Musk can't repay the loan by making the agreed-upon payments (e.g., out of Twitter earnings) then he could be forced to sell Tesla shares. If he can't raise the funds by selling Tesla shares, then he could be forced to give up other personal assets (such as some or all of Twitter or SpaceX)

But this is neither unusual nor particularly risky. We could speculate that Twitter won't be able to support the loan through profits, but Tesla would have to fall much farther before he wouldn't be able to use those shares to repay the loan.

[LetMyPeopleVote]

9. Tesla's shareholders are concerned by this transaction

In effect a controlling interest of one or more public companies are being pledged to secure a loan to acquire a company that has very limited cash flow. Since this is a margin loan, Musk can only borrow 50% of the trading value of the stock. The deal was priced when Tesla was trading at over $1000 per share and now the stock is trading much lower.

If there is a foreclosure, the lenders will be dumping a large number of shares onto the market that will hit the stock price. Tesla shareholders are selling because they do not want to run that risk.

The fact that Twitter stock is trading well below the transaction value is very telling.

I personally doubt that this transaction will close but time will tell

[FBaggins]

10. None of which has anything to do with the OP

Tesla shareholders don't much care what secures the loan after his Tesla shares.

The deal was priced when Tesla was trading at over $1000 per share and now the stock is trading much lower.

That isn't how it works. It was trading over $1000 for a couple of days, but had been around $750 just a couple of weeks earlier. Nobody prices a deal based on a brief blip. Nor is market fluctuation all that relevant when you're nowhere close to 50%

And once again... the primary source of repayment isn't Tesla stock - whether there's a personal guarantee or not. Anyone who loaned him billions of dollars was given reason to believe that the deal itself (i.e., Twitter revenue) would fund repayment of the debt.

[WarGamer]

12. Now now... don't ruin a good "rant" with actual facts.

[LetMyPeopleVote]

16. Thank you for the Bloomberg article

That article proved each and every one of the facts that I was asserting. You might want to read the article before posting it.

[LetMyPeopleVote]

19. Elon Musk Shows Some Buyer's Remorse With Twitter

Musk will have to pay Twitter a breakup fee of $1 billion if calls off the deal. This was always a sketchy deal with suspect financing. The use of a margin loan never made sense, Musk likes the attention but making this transaction work in the real world may not be n the cards.

Link to tweet

https://www.bloomberg.com/opinion/articles/2022-05-13/elon-musk-shows-some-buyer-s-remorse-with-twitter

Elon Musk took to Twitter early Friday to say that his takeover of the company was “temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users.”....

I suspect Musk’s jitters about buying Twitter are all about the money and has nothing to do with how many bots are zooming around the platform. He just doesn’t want to say that. If the richest guy in the world wanted to be more honest about what’s going on, he might have to acknowledge that his primary credit card — his shares in Tesla Inc. — doesn’t have the buying power it once did.

Musk said last month that he wanted to buy Twitter for $43 billion — when he only had about $3 billion in cash on hand. Most of the fortune of the world’s richest man, which added up to some $259 billion at the time, was tied up in his Tesla shares. Since then, Tesla’s shares have lost about 36% of their value, and Musk’s net worth has fallen to about $215 billion......

After all, Musk’s tweet about how many fake accounts there are on Twitter linked to a Reuters news article that is 11 days old. If this was a possible deal-breaker for him, he could have said so then. But the stock market wasn’t unwinding as rapidly at the time, either.

Musk has been able to use his Twitter bid to secure more attention for all of the things he doesn’t like about it. He tweeted yesterday that although he would prefer “a less divisive candidate” for president in 2024, he thinks that Twitter should end its ban on former President Donald Trump. In that context, “less divisive” appears to be a polite way of saying “someone who hadn’t torched the Constitution and tried staging a coup.” But Musk doesn’t appear to be bothered by those nuances – which, of course, makes him a questionable steward of Twitter’s future.

[WarGamer]

20. This makes me smile.

[LetMyPeopleVote]

13. LOL-You are WRONG

Musk has already pledged a large percentage of his Tesla stock to fund SpaceX. Now Musk is pledging most or a very large percentage of his remaining Tesla stock to purchase a company with very little earnings. The SpaceX loan and the proposed Twitter loan are or will be margin loans and so declines in Tesla stock affects how much Musk can borrow.

The stock price of Tesla has declined a great deal since this deal was announced. In the real world, shareholders evaluate all sorts of risks including the concept that a significant percentage of the ownership of the company may be subject to being disposed in a fire sale based on the results of the operations of a company that has little or no earnings.

Twitter has weak revenue in the real world which is why Twitter was unable to find a white knight and had to accept Musk's offer. I personally doubt that Musk will be able to change Twitter in such a fashion to increase revenue in any meaningful amount. If Musk wants to impose user fees on users, there will mask defections. If there was a viable way to increase revenue at Twitter, current management would have pursued it.

Currently Twitter is trading at around $45 a share which indicates that the market has significant doubts about this deal. Musk has one SEC cease and desist in effect due to Musk's 2018 "joke" announcement that he was taking Tesla private and there is a current SEC investigation pending on Musk's ignoring Section 13D of the Securites and Exchange Act (this is the SEC requirement that one notifies the shareholders and the SEC if one has more than 5% of the stock of a public company). There is one lawsuit pending on the 13D violation and at least one shareholder lawsuit pending on the transaction.

In the good old days, the shareholder lawsuit would be settled for some increase in the purchase price and the payment of legal fees to the strike lawsuit attorneys, but this deal may be fully priced already. I have not seen anyone simply ignore Section 13D in the way that Musk did, and that lawsuit and the SEC investigation will be fun to follow

Again, the use of margin loans to finance this transaction and the other factors listed above are good reasons for Tesla shareholders to be worried. I will be curious to see if this deal is consummated.

[LetMyPeopleVote]

17. LOL. Musk deal is on hold

Link to tweet

[WarGamer]

11. I guess you "missed" this...

https://www.bloomberg.com/news/articles/2022-05-12/musk-seeks-to-scrap-tesla-margin-loan-with-new-twitter-funding


Elon Musk is in talks to raise enough equity and preferred financing for his proposed buyout of Twitter Inc. to eliminate the need for any margin loan linked to his Tesla Inc. shares, according to people with knowledge of the matter.

[LetMyPeopleVote]

14. I am not surprised that Musk is pursing such financng

I really doubt that this transaction will work using the margin loan structure. The last time I saw a margin law for an acquisition was back in the good old days before poison pills when hostile tender offers still worked. A margin loan worked in that type of transaction only because it would be a short duration loan that would be paid off when the company did the cleanup merger following the close of the tender offer.

That was a very long time ago.

[LetMyPeopleVote]

15. LOL The reason for the new structure is to avoid risks of the margin loan on Tesla stock

Last edited Thu May 12, 2022, 10:11 PM - Edit history (1)

The use of a margin loan imposes a risk on Tesla that has affected its stock price. I love the discussion about the arbitrage community. This is from the article cited above.

Link to tweet

https://www.bloomberg.com/news/articles/2022-05-12/musk-seeks-to-scrap-tesla-margin-loan-with-new-twitter-funding

It would also alleviate pressure on Tesla’s stock, which is the cornerstone of Musk’s $216 billion fortune, the world’s largest. The electric carmaker has tumbled more than 25% since he agreed to purchase Twitter, stoking concerns among investors that he may sell even more than the $8.5 billion he’s already disposed of to fund the buyout......

Investors, especially those who specialize in merger arbitrage, have been hyper-focused on Musk’s margin loan since he made his offer for Twitter. That’s because as of June 30, Tesla’s chief executive had already pledged more than half of his shares toward other borrowings, leaving him with a limited amount he could put up for the social-media company and raising the risk that a slide in the stock could jeopardize the buyout.

At the initial $12.5 billion size and after his share sales last month, Musk wouldn’t have had enough unpledged Tesla shares to cover the margin loan if the stock fell below $837. At the current $6.25 billion, Musk could withstand a drop to about $420

As of today, Twitter stock closed at around $45 per share because the merger arbitrage community did not trust the margin loan structure. If the market had confidence in the deal, Twitter's stock price would be closer to the $54 per share transaction value.

I thought that this article was also interesting

Link to tweet

https://www.autonews.com/executives/elon-musk-exploring-new-way-finance-twitter-takeover-without-tesla-margin-loan-report

That, on top of the preferred financing, would be enough to eliminate the margin loan, cutting the risk of the buyout for both Musk and his lenders. It would also alleviate pressure on Tesla’s stock, which has tumbled more than 25 percent since the company’s CEO announced his desire to buy Twitter, stoking concerns among investors that he may further whittle down his stake in the electric-vehicle maker.

The risks of the margin loan was affecting the stock price for Tesla. The use of the preferred equity structure will increase the borrowing costs for the deal but decrease the risks to Tesla shareholders. Preferred equity is usually a very expensive form of financing. The investors will require a good rate of return as compensation for the risk and will be paid in front of the regular equity shareholders but behind the true debt. These deals are fun with several groups all fighting over returns and priority of payments.

Let's see if the arbs decide that this is a good deal. Arbs are not going to invest in Twitter stock if they are not comfortable with the financing.

[LetMyPeopleVote]

18. Elon Musk tweeted that Twitter deal is temporarily on hold

It is clear that the margin loan structure would not work. This structure exposed both Twitter and Tesla. The new financing is not cheap https://www.bloomberg.com/news/articles/2022-05-12/musk-seeks-to-scrap-tesla-margin-loan-with-new-twitter-funding

The preferred equity may have a 20-year maturity and include a feature allowing interest to be paid in kind at a rate of 14%, the people said. That interest rate would be increased by 75 basis points in the seventh, eight and ninth year, they added. The financing may alternatively be structured with a 10% interest rate and warrants, one of the people said.

See also https://www.zerohedge.com/political/musk-looking-scrap-tesla-margin-loan-secure-new-twitter-funding

According to the report, the preferred equity may have a 20 year maturity, as well as a feature which would allow interest to be paid in kind at 14%. The rate would be raised by 75 basis points in the 7th, 8th and 9th year. Alternatively, the financing may be structured with a 10% interest rate plus warrants.

Musk has announced that this deal is on hold.

Link to tweet

https://www.washingtonpost.com/technology/2022/05/13/musk-twitter-bid/

Tesla has lost $400 billion in market value since Musk’s interest in Twitter became public in early April, driving a wedge in his acquisition plans at a time when he has committed $21 billion of his wealth to finance the purchase. Musk had planned to buy Twitter with a combination of loans and equity commitments, leveraging into the deal much of his stake in the world’s most valuable automaker — from which he derives most of his wealth.

Link to tweet

Musk’s net worth, which makes him the world’s richest man, has fallen by around $50 billion in recent weeks, according to Forbes’ real-time wealth index. And Tesla stock has shed nearly 30 percent of its value in just the past month.,,,,

Musk has leveraged much of his Tesla stock as collateral for his loans, making the recent economic downturn a particular issue for his bid. Tesla has warned of the risks it faces because of the amount of Tesla stock Musk has put down as collateral. Tesla stocks were trading at under $730 on Thursday, well below the more than $1,100 mark from early April. A drop by several hundred more dollars could trigger requirements that would force Musk to sell some shares, analysts said.

At one point last year, he had put down more than half of his shares as collateral, according to financial filings. Because the Twitter bid would only add to that percentage, Musk has faced pressure to reduce his equity commitment, according to people with knowledge of the matter who spoke on the condition of anonymity to discuss sensitive matters.

It will be interesting to see of Musk can pull off this deal. It is clear that this deal will not be financed based on margin loans using Tesla stock

[FreepFryer]

21. Leave Musk a shrunken husk. Asshole deserves to lose every drop of liquid. (Nt)

[LetMyPeopleVote]

22. From the Hoarse Whisperer

Link to tweet