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Elon Musk seeks to scrap Tesla margin loan with new Twitter funding

May 12, 2022, 6:03 PM UTC

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

The billionaire’s advisers, led by Morgan Stanley, have begun soliciting interest from potential investors for as much as $6 billion in preferred equity financing, the sources said, asking not to be named discussing a private transaction.

Musk, 50, had originally teed up a $12.5 billion margin loan as part of his $44 billion deal to buy Twitter. That was halved to $6.25 billion after he disclosed $7.1 billion in equity commitments from investors including Larry Ellison, Sequoia Capital, Qatar Holding, and Saudi prince Al Waleed bin Talal Al Saud, with the latter rolling his Twitter stock into the deal. 

Since then, Musk has received commitments for another $1 billion in equity, and is in talks for more, one source said.

That additional equity, on top of the preferred financing, would be enough to erase the margin loan, cutting the risk of the deal for both Musk and his lenders. 

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 car maker has tumbled more than 25% since he agreed to purchase Twitter, stoking concerns among investors that Musk may sell even more than the $8.5 billion he’s already disposed of to fund the buyout.

Talking terms

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 sources said. That interest rate would be increased by 75 basis points in the seventh, eighth, and ninth years, they added. The financing may alternatively be structured with a 10% interest rate and warrants, one source said. 

Terms and size of the financing aren’t finalized and could change. Musk can block any transfers of the preferred equity, some sources said. 

A representative for Musk did not respond to requests for comment. A Morgan Stanley representative declined to comment. 

Firms including Apollo Global Management and Sixth Street are already discussing participating in the preferred financing, Bloomberg reported earlier this week.

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 Tesla 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. 

Tesla fell to as low as $680 on Thursday, and traded at $735.61 at 12:33 p.m. in New York. Twitter, meanwhile, surged as much as 3% intraday, before paring its advance. At $45.40, it remains below Musk’s $54.20 offer.

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