Elon Musk’s Twitter Takeover Debt to Be Held by Banks Amid Turbulent Markets

Banks would probably face losses of round $500 million or extra in the event that they tried to promote Twitter’s debt at present market costs, The Wall Road Journal beforehand reported. If all of the banks maintain the debt as an alternative, they will mark it at a better worth on their books on the premise that costs will ultimately rebound.

Twitter might have the doubtful distinction of being the largest so-called hung deal of all time, surpassing a crop of them within the world monetary disaster, when banks have been caught with round $300 billion of dedicated debt they struggled to promote to traders.

The Twitter transfer threatens to carry the faltering leveraged-buyout pipeline to a standstill by tying up capital that Wall Road might in any other case use to again new offers.

The $44 billion Twitter takeover is backed by banks together with Morgan Stanley,

Financial institution of America Corp.

and Barclays PLC, which signed agreements in April to offer Mr. Musk with the debt financing he wanted to purchase the corporate. That they had initially supposed to search out third-party traders, equivalent to mortgage asset managers and mutual funds, who would finally lend the cash as is customary in leveraged buyouts.

However rising rates of interest and rising issues a couple of recession have cooled traders’ urge for food for dangerous loans and bonds. Mr. Musk’s previous criticism of Twitter’s alleged misrepresentation of the situation of its enterprise and the variety of faux accounts on the platform aren’t serving to both—neither is a deterioration in Twitter’s enterprise, the individuals added.

Banks additionally face a timing downside: Mr. Musk and Twitter have till Oct. 28 to shut his deliberate buy, and there’s nonetheless no assure the unpredictable billionaire will comply with by means of or another hassle gained’t come up. (If the deal doesn’t shut by that point, the 2 events will go to court docket in November.) Meaning the banks wouldn’t have sufficient time to market the debt to third-party traders, a course of that usually takes weeks, even when they wished to promote it now.

Assuming the deal closes, banks hope to have the ability to promote a few of Twitter’s debt by early subsequent yr, ought to market circumstances enhance by then, among the individuals mentioned. Twitter’s banks are discussing tips on how to doubtlessly slice up the debt into completely different items that could possibly be simpler for hedge-fund traders or direct lenders to swallow, one among these individuals mentioned.

The banks have good cause to wish to maintain the debt for as quick a time interval as doable.

Holding loans and bonds can drive them to set extra capital apart to satisfy regulatory necessities, limiting the credit score banks are in a position to present to others. Banks additionally face year-end stress assessments, and they’ll wish to restrict their publicity to dangerous company money owed earlier than regulators consider the soundness of their stability sheets.

Thus far this yr, banks have already taken lots of of tens of millions of {dollars} value of losses and been compelled to carry a rising quantity of buyout debt.

Twitter’s debt, together with $6.5 billion of time period loans and $6 billion of bonds, would add to the growing pile banks ultimately intend to syndicate, not too long ago estimated by

Goldman Sachs

at round $45 billion.

Banks’ third-quarter earnings confirmed a steep drop-off in income tied to deal-making. Goldman’s debt-underwriting income dropped to $328 million within the third quarter from $726 million a yr earlier.

Morgan Stanley CEO

James Gorman

mentioned not too long ago that his financial institution has been “fairly cautious within the leveraged-finance area” for brand new offers, whereas Financial institution of America’s

Brian Moynihan

mentioned “there’s been a pure retrenching” within the leveraged-loan market and the financial institution “was working to get by means of the pipeline” of current offers.

Personal-equity corporations, which rely closely on debt to fund their buyouts, have more and more turned to private-credit suppliers equivalent to Blackstone Credit score and

Blue Owl Capital Inc.

These corporations don’t have to separate up and promote debt and may present funding from funding autos established to take action. Though it’s costlier and tougher to return by than earlier this yr, private-credit suppliers have been the principle supply of buyout financing not too long ago.

To take care of money owed they’ve already dedicated to, banks have gotten more and more artistic.

In a take-private of Citrix Methods Inc., banks agreed to show some $6 billion of syndicated time period loans right into a extra conventional financial institution mortgage that they selected to maintain on their stability sheets, however they offered round $8 billion of bonds and loans at a lack of greater than $500 million, the Journal reported. There was additionally a revision within the financing construction of the Nielsen Holdings PLC take-private, with $3 billion in unsecured bonds changing into a junior secured mortgage that private-credit supplier

Ares Capital Corp.

agreed to guide. The banks held the rest of Nielsen’s roughly $9 billion of debt on their stability sheets.

—Matt Wirz contributed to this text.

Write to Laura Cooper at laura.cooper@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com