• If Tesla’s stock price drops, Musk will have to put up more stock to secure his loan
  • Rocket rival Jeff Bezos flags risks to China as Twitter banned in key Tesla market

the Twitter (US: TWTR) The board has accepted Elon Musk’s leveraged buyout offer. For Twitter shareholders, there’s not too much to worry about. They just need to sit back, wait for the deal to close, and pocket the bid price. Bad luck if you bought while it was trading above $70 (£56) per share in mid-2021. There are still doubters, as the social media company’s stock price is trading about 7% below the $54.20 offering price.

The situation for Tesla (US: TSLA) shareholders is more complicated. Musk currently plans to fund the deal with $25.5 billion in debt with a group of banks led by Morgan Stanley, leaving $21 billion in equity commitments that he will have to provide himself.

Musk currently has $3 billion in cash, according to Bloomberg estimates, meaning he will need to generate at least $18 billion by selling other assets he owns. The most obvious way to do this would be to sell his Tesla shares of which he currently owns around $170 billion. Since Twitter’s board accepted the offer, Tesla’s stock price has fallen 11%, bringing it back below the $1 trillion mark in market capitalization.

However, it may not just be equity financing needs that have affected the stock price. Musk must post $62.5 billion of his Tesla stock as collateral for his $12.5 billion margin loan at a 20% loan-to-value (LTV) ratio. There is a chance, however, that if Tesla’s stock price drops, Musk will have to tie up more of his shares in Tesla (or redirect cash from elsewhere in his portfolio) to offset the drop in value.

the Filing with the SEC says that if the loan-to-value ratio exceeds 35% – which would happen if Tesla’s stock price fell more than 43% – then Musk should transfer “enough additional collateral to the collateral account” to bring the LTV ratio “up to or below LTV reset level (25%)”.

That could mean a drop in liquidity for Tesla shares over the life of the loan, which is due to expire in three years. At this point, Musk is likely hoping to repay or refinance the loan through Twitter’s increased value. Leveraged buyouts have often seen massive asset sales after completion, but Twitter doesn’t fit the usual easy-to-split conglomerate buyout target.

If Twitter was nominally worthless in three years, Musk would be required to repay the $12.5 billion, presumably through another Tesla stock sale. Twitter is unlikely to be worthless – but based on Musk’s comments in a recent TED eventhe seems to care little about the economics of the social media company, saying “freedom of speech” was the driving force behind the takeover.

It’s possible that putting Tesla up as collateral could curb some of Musk’s risk-taking with the automaker. Last year, Tesla announced it would accept bitcoin payments and purchased over $1.5 billion worth of the cryptocurrency.

“Does margin lending mean Musk will be tempted to take less risk within the Tesla business to keep the stock price stable? Maybe, and maybe that makes Tesla a safer, albeit less exciting, prospect,” a corporate attorney explained.

“But knowing Musk’s character, I have no idea if that’s going to happen – also, throw in the macro picture of energy markets and supply chains (notably the chip shortage ) and it becomes an even more interesting question.”

Tesla boss’ rocket rival Jeff Bezos has previously pointed to a complication of the new acquisition: “Has the Chinese government just gained a little influence in the city square [Twitter]”, he asked in a message on the social media platform. Musk is counting on cordial relations with China to continue to manufacture and sell his cars in the country. In other messages, Bezos said the most likely outcome would be “complexity in China for Tesla, rather than censorship on Twitter”.

Given that Tesla’s luster has been generated more recently by outstanding financial and operational performance than Musk’s big ideas, more attention for his new toy may not be a bad thing for the automaker’s shareholders. automobile.