Introduction
Morgan Stanley is currently marketing a substantial $5 billion package of bonds and loans for Elon Musk-owned xAI amidst a visible public feud between Musk and the U.S. president.Context
As of last week, the bank initiated discussions about a floating-rate term loan B priced at 97 cents on the dollar, with a variable interest rate of 700 basis points over the SOFR benchmark rate. Additionally, a second option is being offered, featuring loans and bonds at a fixed rate of 12%. The terms are preliminary and contingent upon investor demand, as indicated by a source familiar with the negotiations. Morgan Stanley held a meeting with investors last week to share some financial details about xAI.Developments
Morgan Stanley is adopting a different strategy in marketing the $5 billion debt for xAI compared to previous transactions. Unlike before, the bank will not guarantee the issue volume or commit its own capital, opting for a 'best efforts' transaction. This approach, which relies on investor interest to determine the debt size, reflects a cautious lending stance in the current macroeconomic environment.Previous experiences, particularly the $13 billion commitment to Musk for funding his $44 billion acquisition of X (formerly Twitter), have made banks wary. They were unable to offload that debt for two years, which highlighted the risks inherent in such large commitments. The financing for X is viewed as one of the most audacious moves by the consortium of banks, led by Morgan Stanley, that backed Musk's acquisition.
Traditionally, banks quickly sell such loans to investors after the deal finalizes. However, they were obliged to retain the X financing for over two years until market conditions improved, allowing them to capitalize on xAI's better operating performance leading up to and following the U.S. presidential elections.
Musk's connection to the U.S. presidency has also piqued investor interest for this new debt, as many seek influential ties amid discussions of a new political regime. Furthermore, there is a burgeoning investor interest in artificial intelligence companies.
In addition to the debt market, xAI is in talks to secure approximately $20 billion in equity funding. Some sources suggest that this deal could value the company at over $120 billion, while others indicate negotiations have discussed figures as high as $200 billion. Initially, Musk considered raising these funds alongside a potential merger of xAI with the social media platform, X, but that plan did not progress.
However, Musk's political influence over Trump has shifted dramatically after a recent fallout, which raises concerns about the future stability of Musk's businesses. Being privately held, xAI could face risks if the federal government opts to retract contracts or grants. This heightened uncertainty may lead to diminished demand for any fundraising efforts or necessitate higher risk premiums from investors for the new debt.