Macaskill on markets: Verbal tipping with Elon Musk

Morgan Stanley chief executive James Gorman tried to distract analysts from the likely cost of taking a lead role in the debt financing of Elon Musk’s purchase of Twitter on the bank’s October 14 quarterly earnings call.

“We can’t talk about individual names as much as I’m sure you would all like us to,” Gorman said. “About a year ago, a little over a year ago, we turned quite conservative… We pulled in with our margin book, particularly our Asia margin book. We looked across our whole prime brokerage platform, and we pulled in a little bit with certain clients there.

"And we’ve been quite cautious in the leveraged finance arena,” Gorman said, pointing out that Morgan Stanley was a minor player in the financing of the $16.5 billion Citrix buyout that recently left banks with over $600 million of losses from underwriting related bonds and loans.

“We’re a big institution, we serve a lot of clients,” Gorman added. "You don’t get this perfect, but I feel actually pretty good about the way we have navigated this so far."

The release by a court in late September of texts that were sent and received by Musk relating to the $44 billion Twitter purchase provided an insight into his interaction with advisers. One text that Musk sent to Gorman in April might have been an example of the trolling that the world’s richest person often deploys for comic effect.

“Thanks James, your unwavering support is deeply appreciated,” Musk said, after reading a gushing description of himself by the Morgan Stanley head as a “rocket ship”.

That exchange took place when Musk had just announced his plan to buy Twitter for $44 billion and Morgan Stanley seemed poised to score a quick win from related advisory and debt financing fees.

There was limited disclosure about fees at the time, but analysts estimated that advisory fees for Morgan Stanley and other firms on Musk’s takeover side of the deal would be $50 million or more, with around $200 million in related revenue for the banks providing the acquisition financing.

Twitter’s own advisers, led by Goldman Sachs and JPMorgan, were in line for around $130 million of fees.

Six months later the question for Morgan Stanley and the other banks financing the purchase is how they can best contain losses from their $13 billion commitment to provide debt to help Musk pay for Twitter.

Musk spent the summer making increasingly desperate attempts to pull out of his deal to buy Twitter before admitting defeat and agreeing to go ahead with the purchase on the terms he originally signed in April.

Global credit market conditions deteriorated dramatically during that period, with leveraged finance particularly hard hit. New deal flow slowed sharply and the financing of agreed buyouts became difficult.

The Citrix financing debacle in September locked in losses for firms including Bank of America, Credit Suisse and Goldman that sold bonds and loans to investors at discounts to face value ranging from around 9% to 16%. The banks did not sell all their Citrix debt, and a decision to retain exposure may be one that is forced upon the firms financing the deal to buy Twitter.

The Twitter buyout banks essentially remained on the hook for commitments they signed on April 25 and net losses of multiple hundreds of millions of dollars seem almost certain given the rise in borrowing costs since the initial agreement.

Musk reportedly told the banks that he would help them to sell their debt to fund managers after the expected closing date for the acquisition of October 28, but losses on their holdings seem inevitable.

Morgan Stanley has the biggest exposure among the banks financing the Twitter purchase, but at roughly 27% this is by a relatively narrow margin. Bank of America, Barclays and MUFG (the Japanese bank that still owns around 20% of Morgan Stanley) form a second tier of lenders, followed by BNP Paribas, Mizuho and Societe Generale in a third tier.

By contrast, Morgan Stanley appears to have close to 100% of the attention that Musk is currently willing to devote to banking. The texts by Musk that were released by a court at the end of September provided a cross section of his communications about the Twitter deal, but apart from a single reference to Sam Britton, the co-head of technology, media and telecom investment banking at Goldman, only Morgan Stanley bankers got a look in.

Musk may have been trolling Gorman when he thanked him for his “unwavering support”, but his reliance on Michael Grimes, head of technology investment banking at Morgan Stanley, is clear.

“The Morgan Stanley deal team is truly excellent and I don’t say that lightly,” Musk said in a text to LinkedIn founder Reid Hoffman on April 28 when a search for potential equity investors to share some of the Twitter purchase price was underway.

Hoffman pointed out that he already knew Grimes and shared the sentiment. “Indeed! I took LI [LinkedIn] public and [did] the MSFT-LI deal with them,” he texted back, referring to the 2016 sale of his firm to Microsoft for $26 billion.

When these texts were exchanged, Grimes may have been anticipating a bumper bonus for 2022 on the back of his cut of Morgan Stanley’s fees from the Twitter deal. The praise from Musk is now looking like the equivalent of a verbal tip – or the practice of lavishly thanking a server without making much of a payment as a reward for performance.

It is impossible from the outside to accurately gauge the value of the relationship with Musk to Morgan Stanley. Musk’s family office – which manages wealth that has ranged between roughly $300 billion and around $200 billion this year as the value of his Tesla shares has shifted – is run by Jared Birchall, a former Morgan Stanley banker.

This link helped Morgan Stanley to secure business extending margin loans to Musk based on the value of his Tesla shares well before this year’s Twitter purchase saga began to unfold. Margin loans of this type are highly profitable for banks when the underlying collateral retains its value, but difficult to manage when prices are moving quickly.

The margin loan portion of the Twitter financing that was agreed in April was later dropped, but a prolonged period of exposure to the core debt component of the deal now seems likely for Morgan Stanley. The bank might also have other exposure to Musk that does not have to be disclosed as it tries to generate recurring revenues from wealth management services as well as deal fees.

Verbal tipping by Musk for the work done on the Twitter purchase might accordingly feel like it is adding insult to injury for senior executives at Morgan Stanley as they calculate their profit and loss from exposure to the world’s richest person during 2022 and decide bonuses for bankers.

But at least Morgan Stanley bankers can take some consolation from their access to Musk and the potential to recoup any 2022 losses with future business. The banks that came along for the wild Twitter financing ride without similar access do not have this financial upside – and they apparently don’t even merit a verbal tip to boot.