$13 billion debt ceiling! Bank of America, Morgan Stanley and other investment banks become the most miserable "scapegoats" in Musk's Twitter acquisition case

According to the Zhitong Finance APP, Elon Musk's acquisition of Twitter for as much as $44 billion is becoming one of the worst acquisition deals faced by financial institutions since the global financial crisis. It is understood that seven large banks, including Bank of America and Morgan Stanley, provided Musk with a total of $13 billion in loans to assist him in privatizing Twitter in October 2022 and renaming it X. Typically, banks would quickly resell such loans to remove them from their balance sheets and earn fees.

However, X's financial situation deteriorated rapidly, leading to these banks being unable to sell the debt without suffering significant losses. In other words, these loans turned into so-called "pending" debts. This deal has resulted in about $13 billion in pending debt, meaning that these funds are still owed to the banks, and due to the poor performance of the target assets, their value has significantly decreased and remains unsold.

According to Pitchbook data, this is one of the largest pending deals in the 16 years since the Lehman Brothers' bankruptcy and one of the largest pending deals in history. The time these loans have stayed on the banks' balance sheets is the longest since the 2008-2009 financial crisis, about 20 months, and is still increasing. In comparison, most problem loans after the crisis are usually dealt with within a year.

The seven banks that provided loans to X include Bank of America, Morgan Stanley, Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Societe Generale, and Mizuho. Despite the banks continuing to earn interest income above the market average from the loans, after X disclosed a valuation of $190 billion, its enterprise value seems unlikely to approach the $44 billion Musk paid.

Insiders revealed that these banks have cumulatively lost hundreds of millions of dollars due to these debts, leading to a reduction in capital available for financing other transactions. Nevertheless, a spokesperson for Mitsubishi UFJ Bank stated that the bank has had "constructive discussions" with Musk and expects positive results in debt repayment.

Musk himself has complained about the acquisition price of Twitter, but ultimately decided to proceed with the deal. Banks were willing to provide funding for this transaction in part because Musk and his supporters contributed $30 billion as a debt buffer in case of transaction failure.

This highly anticipated deal not only brought losses to the banks' balance sheets but also directly affected the compensation of bankers. In 2023, some bankers focused on mergers and acquisitions found their compensation reduced by 40% compared to the previous year, largely due to the difficult-to-sell loans on the balance sheet, especially the massive loans for Musk's acquisition of Twitter.

University of Chicago finance professor Steven Kaplan even considers the Twitter acquisition as the largest pending deal in history, putting significant pressure on the banking system.

Nevertheless, X continues to pay high interest rates, and if it can continue to repay these debts and repay the principal at the end of the loan term, banks still have the potential to make a profit. The term of such loans is generally set at 7 to 8 years If X company is able to repay the principal at the maturity of the loan, the bank is expected to fully recover the debt. However, according to another report, insiders revealed that the creditor may face losses of up to $2 billion.

Meanwhile, despite Musk's reforms and cost-cutting measures at X company sparking widespread controversy, Tesla X still appears to be facing financial difficulties. Reports indicate that the company's revenue in the first half of 2023 was $1.48 billion, a 40% decrease compared to the same period last year, further highlighting X company's financial challenges