Who wants to lend money to the world’s richest man, secured against one of the world’s most liquid stocks?
Put like that, it’s not hard to see why lenders were queuing up to provide a record US$12.5bn margin loan to help finance Elon Musk’s US$44bn bid to buy Twitter.
While six other banks joined Morgan Stanley as lead arrangers on the US$13bn of bank loans funding the deal, a whopping 12 lenders were on the margin financing. And several received far lower allocations than they had asked for.
On the face of it, a conservative loan-to-value ratio of 20% provides lenders with a healthy cushion against a sharp decline in the Tesla share price. They can also call in more collateral if the LTV rises too far.
Even so, this jumbo transaction has the potential to tie up the vast majority of Musk’s stake in Tesla after taking into account previous margin loans he has secured. The question is: should that concern the banks involved?
The short answer is: probably not. That’s because even though a large chunk of Musk’s Tesla stake appears to be already pledged in various margin loans he struck prior to negotiating the Twitter financing package, in reality he had borrowed very little of his net worth against these facilities, public filings and sources indicate.
Musk now owns just over 166.6m Tesla shares – 16.1% of the company – after selling more than US$8.5bn of stock in the three days after agreeing to buy Twitter.
Musk would have to stump up a large chunk of those – worth US$62.5bn (over 40% of his remaining Tesla stake) – in order to meet the 20% LTV on the margin loan. That would equate to about 71m shares based on Tesla’s closing price of US$878.51 on Thursday.
Piecing together Musk’s previous margin loan commitments involves poring over various regulatory filings that date from last year. The Tesla chief had pledged 88m shares in the electric car maker as collateral on loans as of mid-2021, according to an August filing, over half the 170m Tesla shares he owned at the time.
Another filing dating from December revealed that Musk owed a total of US$515m under various loan agreements with Morgan Stanley, Goldman Sachs and Bank of America. In other words, Musk appeared to have only borrowed a small fraction of the value of the shares he had pledged. Those shares were worth about US$60bn in mid-2021 and will have only increased further in value given the rise in the stock price since then.
Tesla notes in the August filing that pledging of shares “does not indicate the extent to which there may be actual borrowings against such shares as of such date”. The company also says it has a rule that prohibits executives from borrowing more than 25% of the value of the total amount of stock that they have pledged.
Taken as a whole, this means banks on the margin loan should be able to sleep soundly for the time being.
The US$12.5bn margin loan has been committed by Morgan Stanley, Bank of America, Barclays, MUFG, Credit Suisse, BNP Paribas, Citigroup, Deutsche Bank, Mizuho, RBC, Societe Generale and CIBC.
Fixes typo in second paragraph