That is key for the group of seven banks,which have been left in a lurch after Musk’s sudden reversal to go through with buying Twitter in early October. Normally the banks would offload debt commitments to money managers in the form of junk bonds and leveraged loans before a deal closes,but the compressed timeline and a global deterioration of credit conditions have forced them to keep the debt on their books.

In a normal buyout transaction,the banks,new owner,and company management would come together to hold calls with investors to sell the debt and pitch the business. But the original debt commitment letter stipulated that Musk’s side would help for up to 30 days after closing,and that Musk would participate for at most two hours in any investor meetings.

Banks are facing paper losses of roughly $US500 million on the transaction – pain that would be realised once the debt is sold to institutional investors. The average cost of borrowing spiked this year along with accelerating inflation,recession fears,and geopolitical turmoil,well above the 11.75 per cent maximum interest rate that the banks promised Musk on the riskiest tranche of the debt,leaving them on the hook for the difference. Triple-C rated junk bonds are trading at about 15.8 per cent on average,according to Bloomberg index data.

Wall Street banks have already had to use about $US30 billion of their own cash this year to fund loans for acquisitions and buyouts that they weren’t able to offload to investors. That would swell to over $US40 billion once banks fund the Twitter deal on Friday,as expected.

Twitter’s total purchase price is $US44 billion. The banks committed to provide the debt financing in April – when investor appetite for risky assets was more robust – and originally hoped to sell $US6.5 billion of leveraged loans and $US6 billion of junk bonds,split equally into secured and unsecured tranches.

They also provided $US500 million of a special type of loan typically held by banks called a revolving credit facility,which Twitter will be able to borrow from and pay back until maturity.

Bloomberg

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