The U-turn on buying Twitter Inc could not have come at a better time for the banks to fund a large portion of the $44 billion deal and could cause significant losses, according to Elon Musk.
As in any large acquisitions, banks would try to sell the debt to get it off their books. The investors have lost appetite for riskier debt, such as leveraged loans, spooked by rapid interest rate hikes around the world, fears of recession and market volatility due to Russia's invasion of Ukraine.
Major banks have committed to provide $12.5 billion after selling his stake in Tesla Inc. and leaning on equity financing from large investors.
They include Morgan Stanley, Bank of America Corp., and Barclays Plc.
Mitsubishi UFJ Financial Group Inc,, BNP Paribas SA, Mizuho Financial Group Inc, and Societe Generale SA are also part of the syndicate.
More than 10 bankers and industry analysts told Reuters the outlook was poor for banks trying to sell debt after recent high-profile losses for banks in leveraged financing.
The debt package is comprised of $6.5 billion in leveraged loans, $3 billion in secured bonds and $3 billion in unsecured bonds.
From the banks' perspective, this is less than ideal, said Dan Ives, Wedbush Securities analyst. The banks have their backs to the wall and they have no choice but to finance the deal. There are sources that have previously told Reuters that potential losses for Wall Street banks involved in the Twitter debt could potentially be worth hundreds of millions of dollars.
Societe Generale did not respond to a request for comment, while the other banks didn't respond to it. Twitter didn't want to comment. Musk didn't respond immediately to a request for comment.
In the last week a group of lenders had to cancel efforts to sell $3.9 billion of debt that was financed by Apollo Global Management Inc's deal to buy telecom and broadband assets from Lumen Technologies Inc.
A group of banks had to take a $700 million loss because of the sale of $4.55 billion in debt backing the buyout of business software company Citrix Systems Inc.
The banks are on the hook for Twitter — they took a big loss on the Citrix deal a few weeks ago and they are facing an even bigger headache with this deal, said Chris Pultz, portfolio manager for mergers at Kellner Capital.
Banks have had to pull back from leveraged financing due to Citrix and other deals weighing on their balance sheet and that is unlikely to change anytime soon.
The outlook for dealmaking turned sour as the U.S. banks began to take a hit on their leveraged loans' exposure in the second quarter. Banks will report third-quarter earnings next week.