A Measured Approach to Debt Syndication
Sources familiar with the matter indicate that Morgan Stanley began discussing a floating-rate term loan B last week, priced at 97 cents on the dollar with a variable interest rate of 700 basis points (bps) over the SOFR benchmark rate. A second option, combining a loan and bonds at a fixed rate of 12%, is also on the table. These terms, however, are preliminary and subject to investor demand. A recent meeting with investors saw some of xAI's financial details shared.
In a notable departure from previous transactions involving Musk's ventures, Morgan Stanley is employing a "best efforts" approach for this $5 billion debt package. This means the bank will not guarantee the issue volume or commit its own capital to the deal. While not uncommon, this strategy reflects a more prudent stance by banks in the current uncertain macroeconomic environment. It also likely stems from lessons learned during the financing of Musk's 2022 acquisition of X (formerly Twitter).
Lessons from the X Acquisition Financing
The $13 billion debt package committed by a consortium of seven banks, led by Morgan Stanley, for Musk's $44 billion acquisition of Twitter in October 2022 proved to be a challenging holding for the lenders. Shortly after the deal, the Federal Reserve began raising U.S. interest rates, and Musk initiated a significant restructuring of the company. Typically, banks aim to sell such loans to investors soon after a deal closes, but in the case of X, they were reportedly "stuck" with the debt for over two years.
It was only earlier this year that the banks were able to offload this debt, capitalizing on X's improved operating performance over the previous two quarters and a rise in platform traffic, particularly around the U.S. presidential elections.
Political Dynamics and Investor Interest
Beyond the operational improvements, analysts suggest that Musk's perceived role in President Donald Trump's return to office and his public displays of closeness to the powerful position also stimulated investor interest. This political alignment, combined with a surge in demand for exposure to artificial intelligence companies, contributed to the successful disposition of the X debt.
However, the evolving political landscape presents new considerations for the xAI debt offering. Recent reports suggest a "schism" between Musk and the current U.S. President has emerged, potentially casting a shadow over the future of Musk's private businesses. Such political shifts could lead to a reduction in demand for funds or investors demanding a higher risk premium on new debt if the federal government were to consider canceling contracts or grants to these entities.
Broader Funding Landscape
Alongside the debt offering, xAI has also been in discussions to raise approximately $20 billion in equity funding. Sources indicate that these equity deals could value the company at more than $120 billion, with some discussions even reaching figures as high as $200 billion. Interestingly, Musk initially explored raising funds in parallel with a potential merger of xAI and social media platform X, but that plan did not materialize.
As Morgan Stanley navigates the complexities of the xAI debt offering, the interplay of market dynamics, investor sentiment, and evolving political relationships will undoubtedly shape the outcome of this significant fundraising endeavor.