NEW YORK: Morgan Stanley is promoting a $5 billion bond package along with two loans for Elon Musk’s xAI, coinciding with a public dispute between the wealthiest individual globally and the U.S. president, sources close to the situation informed Reuters. Last week, the bank initiated talks regarding a floating-rate term loan B priced at 97 cents on the dollar, featuring a variable interest rate of 700 basis points (bps) above the SOFR benchmark rate, according to a source familiar with the situation.
It provides an alternative choice, loans and bonds with a fixed interest rate of 12 per cent, the individual knowledgeable about it stated. The conditions are initial and will rely on investor interest, as stated by the source. Morgan Stanley conducted a meeting with investors last week where certain financial details of the company were presented. According to sources familiar with the situation who spoke to Reuters, Morgan Stanley is employing a new strategy to market the $5 billion debt for Musk's xAi.
Sources indicated that Morgan Stanley will not assure the issue volume or allocate its own funds to the transaction. The 'best efforts' transaction indicates that the debt amount will rely on investor demand, a common practice that suggests banks are likely exercising greater caution in lending amid an uncertain macroeconomic climate. Individuals spoke on the condition of anonymity as the talks with investors are confidential. Morgan Stanley chose not to comment, whereas xAI did not reply promptly to a request for comment. Banks likely opted for this method to steer clear of a situation like when they pledged $13 billion in debt to Musk to support his $44 billion purchase of X in 2022, which they couldn't escape from for two years.
The $13 billion debt commitment by seven banks, led by Morgan Stanley, is viewed as one of the most daring investments for the $44 billion acquisition by Elon Musk in October 2022. Shortly after the agreement to purchase Twitter, which was known as X then, the Federal Reserve started increasing interest rates in the U.S., and Musk initiated the company's restructuring. Banks usually sell these loans to investors shortly after finalising the deal, but in X's situation, they were unable to sell them for more than two years. They were only able to eliminate that debt earlier this year by leveraging X's enhanced operating results from the last two quarters, as platform traffic increased before and after the U.S. presidential elections.
Musk's involvement in U.S. President Donald Trump's potential return to office and his visible affinity for the world's most powerful position heightened interest in the debt from investors seeking a significant connection to a new administration, alongside an increase in investor enthusiasm for investing in artificial intelligence firms. In addition to selling debt, xAI has been negotiating to secure approximately $20 billion in equity financing, according to sources familiar with the situation. Two of the sources indicated that the deal would appraise the company at over $120 billion, while the other two mentioned that figures reaching $200 billion had been considered.
Musk first looked into securing financing alongside a merger of xAI and the social media platform X, but that strategy did not progress, according to two individuals. In just a few months, Musk's political influence over Trump has shifted following a bitter split between them. This has created uncertainty for the ventures owned by the wealthiest individual globally, which, although privately held, could suffer if the federal government decides to revoke contracts or grants associated with them. It has additionally increased the likelihood of decreased demand for any funds that will be generated or investors requesting a greater risk premium on the new debt.
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