In October 2022, Elon Musk made headlines with his astonishing $43 billion acquisition of Twitter, a move facilitated by a substantial $13 billion loan from prominent financial institutions. However, since then, the social media platform has been facing challenges in boosting revenue and expanding its user base, causing concerns among financial institutions about potential losses. In a bid to allay concerns, Musk personally assured these bankers that they would not suffer any financial setbacks from the deal.
Musk’s verbal guarantees aimed to ease the anxieties of lenders, compounded by X’s value plummeting by over 50% since the acquisition.
Despite Musk’s assurances, the seven major banks involved in the loan for X buyout – Morgan Stanley, Bank of America, Barclays, MUFG, BNP Paribas, Mizuho, and Société Générale – now face the looming prospect of substantial losses if they decide to sell the debt. The billionaire’s unpredictable actions, including attempts to back out of the acquisition deal in 2022 and recent disputes with advertisers, have complicated the banks’ efforts to offload the debt. This intricate situation underscores the challenges and uncertainties surrounding X’s financial landscape post-acquisition.
Last year, Several large hedge funds and credit investors on Wall Street offered to buy the senior-most portion of the debt at approximately 65 cents on the dollar late. However, recent interviews with these entities, as reported by the Financial Times, indicated a lack of enthusiasm for any offered price in acquiring the bonds and loans. This reluctance is driven by uncertainties related to X’s CEO, Linda Yaccarino, and her ability to turn the business around. A prominent multibillion-dollar firm specializing in distressed debt even went so far as to label X’s debt as “uninvestable.”
Musk’s Verbal Guarantees vs Financial Reality
If the $12.5 billion of bonds and loans were to be sold below 60 cents on the dollar, considered optimistic by many investors in the current market, it would result in losses. The potential losses, calculated by the Financial Times, do not even account for X’s interest payments, which amount to $4 billion or more. The debt structure includes $6.5 billion in term loans, $6 billion in senior and junior bonds, and a $500 million revolver. This situation poses a considerable financial challenge for the syndicate of lenders involved in X’s leveraged buyout.
Interestingly, instead of opting for a quick sale at a potential steep loss, the banks are holding onto the debt, banking on the possibility of improved performance for X following strategic cost-cutting measures. However, with no immediate plans to divest the debt and uncertainties looming over the platform’s future, the banks’ decision is not without its risks.
Elon Musk’s verbal assurances, delivered without a formal contract, add an intriguing layer to this financial saga, leaving observers to ponder whether the entrepreneur can live up to his lofty promises.
I have never lost money for those who invest in me, and I am not starting now,” Elon Musk asserted when questioned about a separate fundraising initiative by his company, X.ai Corp.
The ongoing debate about how the debt reflects on bank balance sheets has become a hot topic among traders and investors on Wall Street. This discussion gains significance against the backdrop of X’s business taking a nosedive since Elon Musk’s acquisition.
Musk, who has already fallen out of favour with marketers/advertisers due to relaxed content moderation, is now grappling with an even bigger challenge. The X platform lost some of its major advertisers following Musk’s endorsement of an antisemitic post in November. Adding fuel to the fire, Musk didn’t mince words, bluntly telling brands that had temporarily halted ads on the X platform over his controversial comments to “go fuck yourself,” specifically targeting Disney’s CEO Bob Iger.
According to Sensor Tower, 50 of the top 100 US advertisers stopped ad spending on the X platform between October 222 and 2023. Consequently, advertising revenue on X is anticipated to decline 40% YoY in 2023.
In response, X is strategically shifting its advertising focus towards small and mid-sized businesses, moving away from a reliance on major advertisers like Disney. Simultaneously, the platform is intensifying efforts to boost revenue through its subscription business, enticing verified users with exclusive benefits. This multifaceted approach aims to position X as a compelling and unique option in the competitive landscape of social media platforms.
Elon Musk’s assurances to lenders have temporarily quelled anxieties, but doubts remain about his ability to deliver on his promises.
As X navigates its uncertain financial path, one question remains: can Elon Musk’s bold vision and strategic manoeuvres steer the platform towards profitability, or will the debt saga leave a lasting stain on the legacy of his social media venture? Only time will tell if Musk’s assurances to lenders will hold water, and whether X can regain the trust of advertisers and its users.
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