Bankers of billionaire
Elon Musk reportedly considers replacing some of the high-interest debt on his
Twitter deal with new margin loans secured by
Tesla stock, according to
Electrek.
Although the loan amount is unknown, the deliberations are apparently focused on replacing a $3 billion unsecured debt with an interest rate of 11%.
How do stock-backed margin loans work?
Billionaires and companies investing their money in stocks frequently use stock-backed margin loans to obtain cash.
For instance, according to
Macro Trends’ data, Tesla has a net worth of $549.58B as of December 7, 2020. However, if all that money is invested in stocks, Tesla would not have any cash to spend, especially for necessary occasions.
That said, banks may provide stock-backed loans. They must sell the equities to recoup the debt if the value drops below a certain threshold.
Stock-backed margin loans are a prevalent financing strategy used by Tesla CEO Musk. However, he seemed to refuse to use it with his $44 billion Twitter deal.
He surprisingly sold Tesla stocks worth billions of dollars. However, more is needed for that enormous acquisition amount.
Musk finalized the Twitter acquisition with $13 billion in bank loans, $33.5 billion in equity commitments, including his $4 billion holding in 9.6% of Twitter, and $7.1 billion from investors including Larry Ellison, the co-founder of Oracle Corp., and Saudi Prince Alwaleed bin Talal.
As per the report, the $13 billion debt led the company to incur yearly interest costs of $1.2 billion, causing increased pressure on Tesla’s finances.
In order to address this financial matter, Musk’s bankers are once again considering Tesla-backed margin loans, as per
Bloomberg.
“Elon Musk’s bankers are considering providing the billionaire with new margin loans backed by Tesla Inc. stock to replace some of the high-interest debt he layered on Twitter Inc., according to people with knowledge of the matter.”
Bloomberg
However, it must be noted that the reported plan is yet to be confirmed. The banks will not likely attempt to sell any of the debt associated with Twitter to institutional investors until the new year. They anticipate that by that time, the company will be able to provide a more precise illustration of how Musk’s actions have influenced its operations.
