JUST a few months ago, Morgan Stanley was stuck with billions of US dollars of unloved debt tied to Elon Musk’s controversial 2022 buyout of social-media platform Twitter. It took one election and a billionaire bromance to flip the script.
Helped by Musk’s singular relationship with President Donald Trump and the tech mogul’s newfound proximity to the White House, Morgan Stanley is discovering that investors are drawn to the debt of the company now called X as it leads banks in marketing a US$3 billion offering. Potential buyers who already got a peek at X’s financials are seeing signs of a rebound. And as an added bonus, investors will gain exposure to the company’s stake in Musk’s artificial intelligence project, xAI.
Morgan Stanley’s pitch includes results that show an adjusted version of X’s 2024 profits, or earnings before interest, taxes, depreciation and amortisation, at roughly US$1.2 billion, according to people with knowledge of the matter. The financials also reflect X getting a bump from election-related buzz, posting about US$400 million in Ebitda on US$710 million of revenue in the last three months of the year – both higher than the two preceding quarters.
That’s paving the way for the bank and other lenders to start offloading what has been a blight on their balance sheets for the better part of three years. Buyout loans that had been receiving bids for roughly 60 cents on the US dollar are now being shopped at or above 95 cents, according to people familiar with the Morgan Stanley-led sales process.
A Morgan Stanley representative declined to comment.
Parsing the numbers
X’s numbers suggest that revenue is down by nearly half from the time of the buyout three years ago, but they also indicate that Musk’s drastic cost-cutting efforts have helped the business chart a turn. As for earnings, the marketed Ebitda is roughly flat from that time before Musk jumped in, but contains a variety of adjustments that help boost the numbers, the people said. While that might not merit the lofty US$44 billion valuation Musk slapped on the business, it’s enough to draw interest of secured creditors.
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“If they thought they had lost 40 per cent of their principal and now get out at something close to break even, that’s a nice turnaround,” said Espen Robak, president and founder of Pluris Valuation Advisors, which specialises in illiquid and hard-to-value assets.
One note of caution highlighted by investors in X’s financials relates to its revenue and earnings from “related parties” outside of X’s core social-media platform, said some of the people. And restructuring expenses from Musk’s decision to lay off a huge portion of X’s staff, as well as investments, will be added back into results. Investors will also see that X has US$400 million worth of cash on its balance sheet – a sharp decline from the US$1.4 billion it had in 2022, people familiar said.
Ultimately, even if X’s core figures paint a mixed picture, buyers may not care because of the exuberance around Musk, the people said.
The transaction follows a US$1 billion sale of X debt the banks recently completed between 90-to-95 cents on the US dollar as a test of market appetite. And it’s a welcome turn in fortune for Morgan Stanley, which advised Musk on his 2022 purchase of Twitter and led seven banks that arranged US$13 billion in debt financing for the deal.
The underwriting group had planned to resell the debt to investors, who would take on the risks associated with it. Instead, the banks were met with a buyers’ strike, and had to slash the value of their holdings as X’s business deteriorated, largely due to a series of jarring business decisions by Musk. Interest-rate hikes by the Federal Reserve only made things worse.
To be sure, the banks that underwrote the leveraged buyout have earned about US$3 billion of interest on the X debt since 2022, according to Bloomberg calculations, far exceeding any paper losses. But the situation hasn’t been ideal. Banks typically try to market corporate loans they’ve underwritten to investors as soon as possible to free up their balance sheets. So-called hung debt is considered a black eye.
Now, though, events are transpiring to make X debt more appealing to investors. Musk, a zealous Trump supporter, is now a consultant to the new administration and investors expect that relationship with the president to boost his business interests.
Morgan Stanley has been portraying X’s US$6 billion stake in xAI as an advantage for debtholders. The idea is not only that the business could flourish, and therefore help X, but that they could have a claim on that xAI stake if things go awry.
Despite some of the offbeat manoeuvres, there seems to be no shortage of investors wanting a chance to own a piece of X, and therefore the Musk empire. After news broke last week about the US$1 billion loan sale, Morgan Stanley got a swell of enquiries, some of the people said.
Lofty yield
The US$3 billion of debt on sale now matures in 2029 will pay interest of 6.5 percentage points above the benchmark Secured Overnight Financing Rate. That amounts to a lofty yield of roughly 12 per cent. The price reflects the risk of buying debt of a company that is not currently assessed by credit ratings agencies and whose leverage ratio is roughly 10 times earnings.
The latest marketing efforts probably won’t be the last as banks seek to offload X exposure. The current offering is safer than other, unsecured portions that lenders also have on their books. It is far less certain that they will sell riskier pieces anywhere close to face value, if it can be done at all.
Hung debt is unusual in itself, but the ups and downs of the Twitter-turned-X deal are almost unheard of – including what might possibly become a profitable resolution for Wall Street bankers who only a few months ago were staring down a much different outcome.
Looking at the full picture of their fees, interest income and proposed valuations for loan sales, the banks will almost certainly earn a profit on the X transaction, said Robert Willens, a tax and accounting expert.
“They have certainly recovered more than 100 cents on the dollar,” he said. BLOOMBERG
