Royal Bank of Canada and Canadian Imperial Bank of Commerce are lining up behind Elon Musk’s US$44-billion takeover of Twitter Inc., with the two Canadian banks putting US$1.15-billion into the lowest-risk loan to the Tesla Inc. chief executive officer.
Mr. Musk announced a deal to buy social-media platform Twitter on Monday using US$25.5-billion borrowed from a dozen banks, led by Morgan Stanley. The world’s richest person, with a net worth of more than US$250-billion, will tap his own capital for the remainder of the purchase price.
The largest element of the Twitter financing is a US$12.5-billion loan backed by a portion of Mr. Musk’s 17-per-cent stake in Tesla, which is currently worth about US$170-billion.
RBC and CIBC are among 12 banks involved in this loan, according to regulatory filing. RBC pledged US$750-million and CIBC put up US$400-million. The lead bank on the entire financing, Morgan Stanley, promised US$2-billion.
The package also includes an unsecured US$3-billion bridge loan – money borrowed with no collateral – and a US$6.5-billion seven-year term loan. The risks that come with each level of debt are reflected in the interest rates the banks are charging Mr. Musk.
On the loan secured by his Tesla shares, Mr. Musk will pay an interest rate that is three percentage points over the benchmark secured overnight financing rate (SOFR), which was about 1.04 per cent on Monday. The banks also charged Mr. Musk a US$62.5-million fee to set up the loan.
The Canadian banks’ funding is the lowest-cost debt in the Twitter financing package, and therefore the least risky loan. In the worst-case scenario, with Mr. Musk defaulting on the loan and the banks seizing his Tesla shares, lenders are likely to be repaid in full. RBC’s analyst who follows Tesla currently has a US$1,175-per-share target price on the auto maker, which is 18 per cent higher than where Tesla shares were trading on Monday.
Canadian banks are conspicuous in their absence from the remainder of Mr. Musk’s loans, which come at far higher interest rates. The $6.5-billion term loan pays 4.75 percentage points over SOFR and there is a US$3-billion secured bridge loan with a rate set at 6.75 percentage points over the benchmark. Mr. Musk is pledging his stake in Twitter as collateral for both loans.
The most expensive debt, a US$3-billion unsecured one-year bridge loan, sees Mr. Musk pay 10 percentage points over SOFR to seven banks, including two Japan-based lenders – MUFG and Mizuho – and two banks from France, BNP Paribas and Société Générale.
Buyers typically move quickly to pay down bridge loans after takeover. However, Mr. Musk is not a typical dealmaker. At a conference in Vancouver earlier this month, Mr. Musk said his offer to buy Twitter is “not a way to make money” and stated “I don’t care about the economics at all.”
In announcing an agreement with the Twitter board on Monday, Mr. Musk said in a press release: “Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated.”
Mr. Musk, who studied at Queen’s University in Kingston for two years before earning degrees at U.S. schools, said he wants to improve Twitter “by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans.”
Along with Morgan Stanley, Mr. Musk’s financial advisers are BofA Securities and Barclays. Goldman Sachs & Co. LLC, J.P. Morgan, and Allen & Co. are serving as financial advisers to Twitter.
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