Elon Musk’s acquisition of Twitter could be the worst leveraged buyout (LBO) deal for banks since the 2008 global financial crisis, adding to the worrying signs that the deal could prove costly for Tesla (TSLA) shareholders.
While more than half of the $44 billion investment came from Elon Musk, some $13 billion had to be raised through a consortium of lenders to avoid overwhelming Tesla shareholders after the entrepreneur liquidated billions of dollars worth of Tesla stock.
Typically, Wall Street banks would finance the debt financing of large deals, then package and sell them to professional investors like hedge funds and pension plans within weeks or sometimes months. But the bad timing of the October 2022 Twitter deal, which closed just as borrowing costs were starting to rise, combined with the social media company’s dire financial situation, left asset managers feeling unimpressed.
Nearly two years later, investment banks have failed to service the debt, tying up precious capital and limiting their ability to originate and finance more deals. In fact, no LBO debt has remained on the balance sheet longer since the Lehman Brothers bankruptcy, according to new information from PitchBook LCD, cited by the Wall Street Journal on tuesday.
The previous record was set 13 months ago, when auto parts company Tower Automotive was acquired by private equity firm Cerberus in 2007, at the height of the subprime bubble.
The data gives no indication that X has breached its loan terms, which is usually the first sign of trouble, and the company has not responded to a Fortune request for comment.
However, reports in recent months show that Musk has repeatedly tried to assuage bankers’ concerns, even as he demanded less onerous terms.
Unsustainable debt
When the deal was signed, Twitter was expected to earn more than $1 billion in interest annually, before capital expenditures and operating costs. That’s a problem, considering revenue in its key U.S. market may be around $600 million this year , and even before Musk’s acquisition, Twitter had struggled to monetize its user base.
Fortune reported in October that Musk had held repeated talks with bankers to discuss debt restructuring to create more financially sustainable terms.
According to the Wall Street Journalbut those talks have reached an impasse. While it remains unclear whether X is currently paying its debt, evidence from at least one bank suggests it is affecting the lenders’ profits.
Thanks largely to the legacy of Twitter LBO debt, Barclays’ senior M&A team was informed last year that their annual compensation would be cut by 40% compared to the previous year. The cut was so severe that nearly a quarter of the bank’s 200-plus managing directors resigned after collecting it.
Musk may yet pull a rabbit out of the hat, but X’s financial woes have Tesla bulls ringing alarm bells. Halter Ferguson Financial warned last week that Musk may be forced to sell $1 billion to $2 billion worth of Tesla stock to plug financial cracks opening up at Twitter, now X, with fresh injections of loss-absorbing equity.
Fortune reached out to Barclays and Tesla for further comment.
This story originally appeared on Fortune.com
